US Dollar declines following soft PPI figures
- DXY index slips below 103.00 as US Producer Price Index figures disappoint.
- US economic growth continues to trend upwards, suggesting markets may be overestimating aggressive easing requirements.
- CPI is now in focus for a clearer inflation outlook.
On Tuesday, the US Dollar (USD), measured by the US Dollar Index (DXY), showed a mild decline falling under the 103.00 level. This drop followed disappointing Producer Price Index (PPI) figures, which fell short of analysts' estimates.
Based on the entire economic data, the US economy continues to achieve growth above the trend. This suggests that market participants may be overestimating the need for aggressive monetary easing as the Federal Reserve (Fed) may request more data before cutting.
Daily digest market movers: Mild decline follows underwhelming PPI figures
- The release of the Producer Price Index (PPI) for final demand in the US showed a YoY rise of 2.2% in July, less than the market expectation of 2.3%.
- The annually adjusted core PPI also rose by 2.4%, missing analysts' estimated increase of 2.7%.
- On a monthly scale, the PPI saw a 0.1% rise, while the core PPI remained unmoved.
- As for now, A 50-basis-point cut is possible but will entirely depend on the data, with current odds at around 55%. The market is still fully expecting 100 basis points of easing by the end of the year and a total of 175-200 basis points of trimming over the next 12 months.
- This rate path seems improbable unless the US economy enters a severe recession.
DXY technical outlook: Bearish trends continue amid weak buying efforts
There is no significant change in the technical outlook for DXY, bearing in mind the moderate selling pressure. The momentum-based Relative Strength Index (RSI) is stable below the 50 mark, indicative of a sustained selling approach. The Moving Average Convergence Divergence (MACD) continues to graph negative values as the red bars level off, demonstrating continued bearish activity despite flat market movement on Tuesday.
The Index position rests beneath the 20, 100 and 200-day Simple Moving Averages (SMAs), pointing to a predominantly bearish trend.
Support Levels: 102.80, 102.50, 102.20
Resistance Levels: 103.00,103.50, 104.00
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
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