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- US Dollar cemented as traders await big US inflation reading
US Dollar cemented as traders await big US inflation reading
- The US Dollar holds on to gains for the week.
- Big data dump expected later today with US July Consumer Price Index.
- The US Dollar Index is expected to have a very binary outcome on the inflation data.
The US Dollar (USD) is a touch softer this Thursday in a calm start of the trading days as traders will focus on the batch of important US data due later in the session. Meanwhile, the Greenback is trading very mixed on the quote board, though overall it is holding on to weekly gains. The data numbers later this Thursday are expected to fuel a substantial move in any direction.
The focal point today is at 12:30 GMT, when all metrics of the US Consumer Price Index (CPI) are about to be released to the markets. At that same time, we will see the weekly jobless statistics. The cherry on the cake is right at the end at 19:00 GMT when Federal Reserve (Fed) speakers Raphael Bostic from Atlanta and Patrick Harker from Philadelphia are due to speak and comment on Thursday’s inflation numbers and what they could mean for the central bank’s September policy meeting.
Daily digest: US Dollar expected to cover some ground
- At 12:30 GMT, all hell will break loose in global markets as the US CPI is due to come out. Expectations on the monthly index are for the headline and core inflation to remain steady at 0.2%. On the yearly time frame, headline CPI is expected to jump from 3% to 3.3% and the core reading to remain steady at 4.8%.
- In all the noise of the US CPI publication, the US Labor department will issue the weekly jobless claims: Initial jobless claims are expected to tick up from 227K to 230K. The continuing claims are expected to remain quite steady with a minor uptick from 1.7M to 1.71M.
- The US treasury is heading back to the markets to refinance some debt with a 4-week bill and a 30-year bond auction.
- Markets could quickly see the Fed stepping in and put a lid on any undesired move in the markets on the back of the CPI numbers. Fed speakers Bostic and Harker are due to speak at 19:00 GMT and could deliver some guidance on what the recent US CPI numbers could or could not mean for the Fed’s decision in September and beyond.
- Stocks are currently ignoring the possible event risk at hand later this Thursday with green numbers across the board and across the regions. The Japanese Topix index nearly closed up 1%, while the Chinese Hang Seng is up near 0.5%. European equities are more than happy to take over the positive sentiment with the German DAX and European Stoxx 50 trading nearly 1% in the green. US equity futures are no different and point to a green opening for Wall Street.
- The CME Group FedWatch Tool shows that markets are pricing in an 86.5% chance that the Federal Reserve will pause interest rate hikes at its meeting in September. In case the US CPI numbers point to a further inflation decline, that chance might increase to a 90% probability or more.
- The benchmark 10-year US Treasury bond yield trades at 4.02% and is very steady since Wednesday. Expectations are with this decline in volatility, that a breakout is due. That breakout could come this Thursday on the back of the US inflation numbers.
US Dollar Index technical analysis: consolidation point reached
The US Dollar is giving US Dollar bulls a hard time after a good start of the week, while gains are starting to evaporate since Wednesday. Meanwhile, the US Dollar Index (DXY) is back at the lower support level that will be crucial on where the DXY will close this week. Expect the US CPI numbers to act as catalyst for any move and look for technical levels to confirm if the breakout is substantial or short-lived.
For the upside, 102.42 – where the 55-day Simple Moving Average (SMA) is located – is again in play on the upside. This level needs to be broken yet again and needs to see a full daily close above before starting to think about 103. To do so, the double peak near 102.80 needs to be broken as well and print a new monthly high.
On the downside, bears have already breached the defence line of the US Dollar bulls at 102.31 - at the 100-day SMA - earlier this Thursday. Should the US CPI numbers support a weaker Greenback, expect to see some sharp losses in a few specific pairs or crosses against the USD. Expect 102 to come under pressure, and once the low of last week at 101.75 gets breached, expect this to be the end of the DXY rally for now.
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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