US Dollar strengthens as markets sink teeth into hot CPI data
- The DXY Index is witnessing an uptick toward 102.60.
- Headline and core CPI from December came in higher than expected.
- Investors are still confident that the Fed will cut in March.
The US Dollar (USD) Index has climbed to 102.60 as financial markets continue to grapple with the release of a hot US Consumer Price Index (CPI) report from December, which came in higher than expected. Dovish bets eased somewhat, but markets are still betting on the Federal Reserve (Fed) easing cycle to begin in March.
The Fed's dovish stance, based on welcoming the cooling inflation and projecting no rate hikes in 2024, has recently weakened the USD and seems to be offsetting the resilience of the US economy while other economic blocks are weakening. Despite higher CPI numbers, the market remains stubborn and expects the Fed to initiate its easing cycle sooner rather than later. As long as this rhetoric predominates, the index's upward potential is limited.
Daily digest market movers: US Dollar climbs with hot CPI figures, dovish bets still high
- The US Bureau of Labor Statistics revealed that the Consumer Price Index (CPI) escalated to 3.4% YoY in December, surpassing November's 3.1% and the predicted 3.2% consensus figure.
- The core CPI dropped to 3.9%, lower than November’s 4%, but higher than the expected 3.8%.
- Yield rates for US bonds display mixed trends: 2-year bond yield at 4.33%, 5-year at 3.96%, and the 10-year bond yield is 4.01%.
- The CME FedWatch Tool reveals no rate hike predictions for the January meeting. Instead, March and May 2024 meeting expectations indicate increased probabilities for rate cut-offs despite hot inflation readings.
Technical Analysis: DXY index bulls make another stride as momentum gathers
Despite the index's location below both the 100 and 200-day Simple Moving Averages (SMAs), which suggests sustained pressure from the bears, the position of the index above the 20-day SMA is evidence that the bulls are gaining ground in this battle. This is clear from the uptick in buying momentum and indicates the potential for further short-term upside movements.
Secondly, the positive slope in the Relative Strength Index (RSI) corroborates this view. This signals that despite the recent bearish backdrop, buying momentum may be growing in strength, illustrating an increasing pressure from the bulls.
Lastly, the flat green bars on the Moving Average Convergence Divergence (MACD) provide further validation of this mixed sentiment. While the bars indicate a stillness in momentum, their green shade suggests a column of buying forces vying to tip the scale.
Taken altogether, the bulls appear to be gaining ground momentarily. However, the dominant bearish forces, given away by the positioning below the 100 and 200-day SMAs, must not be overlooked.
Support levels: 102.30, 102.00 (20-day SMA), 101.80.
Resistance levels: 102.70, 102.90, 103.00.
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.