US Dollar surges amid hot January CPI data
- The DXY rose to 104.80 on Tuesday, past the key resistance of the 100-day SMA.
- US Treasury yields soared as January’s Core CPI came in higher than expected.
- The odds of a cut in May have fallen to 40%, according to the CME FedWatch Tool.
The US Dollar (USD) witnessed an upward thrust on Tuesday, trading at 104.80 on the Dollar Index (DXY). The Greenback was boosted by January's Consumer Price Index (CPI), which made markets delay the start of the Federal Reserve’s (Fed) easing cycle.
After Jerome Powell, the Federal Reserve Chair indicated that a cut in March was unlikely due to the bank still needing additional evidence on falling inflation, higher inflation than expected on Tuesday benefited the US Dollar as markets begin to eye June as the start of easing.
Daily digest market movers: US Dollar soars as Core CPI from January comes in higher than expected
- Reports by the US Bureau of Labor Statistics showed a 0.4% MoM increase in the Core inflation rate for January, surpassing the consensus and previous figures of 0.3%.
- On a YoY basis, Core inflation remained steady at 3.9%, maintaining the previous numbers but outdoing the forecasted 3.7%.
- A rise in the US Treasury bond yields was observed following the data. Current rates place the 2-year yield at 4.60%, the 5-year yield at 4.26%, and the 10-year yield at 4.27%, which benefits the US Dollar.
- Market expectations for rate cuts based on the CME FedWatch Tool for the next May meeting dropped to 40%, while those odds rose to 50% for the June meeting.
Technical analysis: DXY bulls step in and conquer the 100-day SMA
On the daily chart, the Relative Strength Index (RSI) exhibits a positive slope and trades in positive territory, indicating a strong buying momentum among investors. This reveals that the market is demonstrating buyer dominance, supporting the notion of further upward market movement.
The Moving Average Convergence Divergence (MACD) histogram illustrates rising green bars, reinforcing the bullish momentum painted by the RSI. This suggests that investors are displaying a strong risk appetite and are buying the asset aggressively.
In a broader context, the index is now trading above its 20, 100, and 200-day Simple Moving Averages (SMAs), suggesting a bullish market structure. The position of the DXY above these significant SMAs bolsters the dominance of bulls on larger time frames.
In conclusion, the technical indicators on the daily chart conclusively reflect a prevalent buying momentum in the market. This, coupled with the fact that bulls are gaining ground, means a sustainable move in the upward direction would more likely be the order of the day in the foreseeable future in case bulls receive additional fundamental stimulus.
US Dollar FAQs
What is the US Dollar?
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.
How do the decisions of the Federal Reserve impact the US Dollar?
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.
What is Quantitative Easing and how does it influence the US Dollar?
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.
What is Quantitative Tightening and how does it influence the 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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