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- US Dollar recovers after hot CPI on the back of rising yields
US Dollar recovers after hot CPI on the back of rising yields
- The US Dollar is getting traction, with the DXY rising to weekly highs.
- US headline CPI from September came in at 3.7% YoY, beating expectations. The core measure decelerated to 4.1% as expected.
- The hot CPI boosted US yields, which are showing sharp increases.
The US Dollar (USD), measured by the DXY US Dollar Index, trades with nearly 0.50% gains driven by rising hawkish bets on the Federal Reserve (Fed) after the release of September’s Consumer Price Index (CPI) data from the US.
The United States economy is running hot, and the slightly higher-than-expected inflation reading reminds investors that the Fed is still data-dependent and that, in this case, they could consider another hike in the remainder of the year to combat the sticky inflation. The Federal Open Market Committee (FOMC) Minutes from the September meeting released on Wednesday noted this, showing that members are considering the data volatility and the lags of financial tightening in their decisions.
Daily Digest Market Movers: US Dollar regains momentum as US bond yields and hawkish Fed bets rise
- The DXY US Dollar Index gained momentum and rose to 106.30, a weekly high.
- The US Consumer Price Index (CPI) increased 3.7% YoY, which was higher than the market consensus of 3.6% and matched the previous monthly figure. On the other hand, the Core measure came in at 4.1% YoY, matching the expectations and decelerating from the previous 4.3% YoY.
- The September US Producer Price Index (PPI) rose 2.2% on Wednesday, higher than the expected 1.6% and accelerating from the previous 2%.
- U.S. bond yields are increasing across the board. The 2-year yield has climbed to 5.07%, marking a substantial rise of over 1.50%. Similarly, the 5-year and 10-year yields have surged to 4.64% and 4.66%, respectively, showing strong advances of nearly 2%.
- According to the World Interest Rates Possibilities (WIRP) tool, the odds of a 25 basis point hike (bps) by the Federal Reserve rose to nearly 50% for the December meeting.
Technical analysis: US Dollar Index’s bulls revive to retake 20-day SMA
The DXY US Dollar Index still displays a neutral to bearish technical outlook in the short term, according to the daily chart. Buyers need to build strong support over the 20-day Simple Moving Average (SMA), but they will still face challenges from the bears who gathered strong momentum in the last sessions. The Relative Strength Index (RSI) displays a positive slope above its middle-point, while the Moving Average Convergence Divergence (MACD) stands in negative territory.
Supports: 106.00 (20-day SMA), 105.80, 105.50.
Resistances: 106.50, 107.00, 107.30.
Fed FAQs
What does the Federal Reserve do, how does it impact the US Dollar?
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money.
When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
How often does the Fed hold monetary policy meetings?
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions.
The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
What is Quantitative Easing (QE) and how does it impact USD?
In extreme situations, the Federal Reserve may resort to a policy named 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 during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
What is Quantitative Tightening (QT) and how does it impact the US Dollar?
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
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