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- US Dollar flattens as traders gear up for another expected decline in inflation
US Dollar flattens as traders gear up for another expected decline in inflation
- The Greenback trades broadly flat ahead of US CPI numbers.
- Traders appear torn between the expected decline in inflation and against the Fed’s cautious comments.
- The US Dollar Index faces a string of volatile events this week.
The US Dollar (USD) is flat on Tuesday ahead of the crucial US inflation data for October. The Polish Zloty (USD/PLN) is the only pair making a substantial profit against the Greenback, which had a volatile ride overnight after rating agency Moody’s issued a negative outlook for the AAA rating of the US.
On the calendar front, all eyes are on the US Consumer Price Index (CPI). Expect traders to send the Greenback weaker if inflation continues its decline, while a surprise uptick might see US Dollar strength come into play. Strong inflation would make markets price in another rate hike, which will translate to a US Dollar advancing several big figures against most major G20 currency peers.
Daily digest: US Dollar set for pickup in volatility
- Fed Vice Chair Philip N. Jefferson is due to speak at 10:30 GMT.
- At 11:00 GMT, the National Federation of Independent Business (NFIB) is due to release its Business Optimism Index for October. Previous number was at 90.8.
- The US Consumer Price Index is due to be released at 13:30 GMT:
- Monthly Headline inflation is expected to head from 0.4% to 0.1%, with a range from 0% to 0.2% on estimations.
- Monthly Core Inflation is expected to stay stable at 0.3%, with a range from 0.2% to 0.4% on estimations.
- The yearly headline inflation rate is expected to slide from 3.7% to 3.3%, with a range of 3.2% to 3.4% on estimations.
- The yearly core inflation rate is expected to stay stable at 4.1%, with a range from 3.7% to 4.2% on estimations.
- Chicago Fed President Austan Goolsbee is due to speak at 17:45 GMT.
- Equities are in a holding pattern, with no real outliers to report across the globe. It looks that nothing substantially will be moving ahead of the US inflation print.
- The CME Group’s FedWatch Tool shows that markets are pricing in a 85.7% chance that the Federal Reserve will keep interest rates unchanged at its meeting in December. The possibility of a pause has diminished a bit ahead of the inflation numbers due to come out this Tuesday.
- The benchmark 10-year US Treasury yield trades at 4.62%, and is slowly making its way up again.
US Dollar Index technical analysis: US Dollar technically a sell
The US Dollar could be in a difficult moment from a pure technical point of view as the US Dollar Index (DXY) has breached the key 55-day Simple Moving Average (SMA). With a daily close and an opening on Tuesday below this 105.72 level, more downturn could be in the cards. In case the US CPI numbers are confirming the downtrend is not losing pace, expect a 1.4% devaluation in the DXY before finding the next support.
The DXY was looking for support near 105.00, and was able to bounce ahead of it earlier last week. Any shock events in global markets could spark a sudden turnaround and favour safe-haven flows into the US Dollar. A rebound first to 105.85 would make sense, a pivotal level from March 2023. A break above could mean a revisit to near 107.00 and recent peaks printed there.
On the downside, 105.10 is still acting as a line in the sand. Once the DXY slides back below that, a big air pocket is opening up with only 104.18 as the first big level, where the 100-day SMA can bring some support. Just beneath that, near 103.58, the 200-day SMA should provide similar underpinning.
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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