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- US Dollar stuck at 102 area despite Fed Mester’s pushback against March cut
US Dollar stuck at 102 area despite Fed Mester’s pushback against March cut
- The US Dollar is unable to bank on hot inflation numbers and Fed pushback on rate cuts.
- Traders see tensions in the Middle East head an echelon higher with UK and US bombing Houthi rebels.
- The US Dollar Index steadies at 102 and is going nowhere for now.
The US Dollar (USD) should be expected to be trading around 103 in its US Dollar Index (DXY) after the red-hot inflation data from Thursday. The headline inflation rate was the biggest omen for Greenback bears who are betting on quick interest rate cuts, while US Cleveland Federal Reserve President Loretta Mester poured more fuel on the fire by saying cuts in March are too early. Though, the Greenback is not moving in any direction and remains stuck at 102 all the while that geopolitical tension in the Middle East is ramping up. This comes after the United Kingdom and United States held an organised joint air strike on Houthi rebels positions in Yemen.
On the economic data front the Producer Price Index numbers are on the docket. Traders will get to see if the pickup in inflation was only for the end consumer, or is as well notable on the producer side. If the latter is the case, that means that commodity prices are set to pick up again as well, with a possible rise in inflation in the coming months to come.
Daily digest market movers: Pickup in PPI might mean issues ahead
- Cleveland Fed member Loretta Mester already spoke overnight and dampened hopes for quick rate cuts by saying that March is off the table.
- The UK and US have performed joint airstrikes on Houthi positions in Yemen. Houthi rebels said retaliation will be taking place soon.
- Producer Price Index (PPI) numbers for December to be released near 13:30 GMT:
- Monthly headline PPI is expected to head from 0% to 0.1%.
- Yearly headline PPI is expected to head from 0.9% to 1.3%.
- Monthly core PPI is seen heading from 0% to 0.2%.
- Yearly core PPI will contract a touch from 2% to 1.9%.
- Minneapolis Fed President Neel Kashkari is due to speak around 15:00.
- Equity markets are not really reacting to any news with a very dispersed image on the quote board: Japan already closed off for the week, both this Friday and this week with positive returns. European equities are showing near 1% gains during European trading, while US futures are flat ahead of the US session.
- The CME Group’s FedWatch Tool shows that markets are pricing in a 95.3% chance that the Federal Reserve will keep interest rates unchanged at its January 31 meeting. Around 4.7% expect the first cut already to take place.
- The benchmark 10-year US Treasury Note holds near 3.96%, and is trading near the low for this week. The move comes as a surprise given the uptick in inflation.
US Dollar Index Technical Analysis: Can you spot the triangle?
The US Dollar Index (DXY) is stuck in a rut, and is not going anywhere it seems, even with recent inflation numbers not providing fuel for the DXY to jump back above 103. From a pure technical point of view, lower lows are coming in, while a sort of floor is forming, pointing to a descending triangle. Pressure is building and once the floor, around 102 snaps, it seems a given that the DXY will tank towards 101.
The first level on the upside to watch is 102.70, which falls nearly in line with the trend line from the top of October 3 and December 8. If broken and closed above, the 200-day Simple Moving Average (SMA) at 103.43 comes into play. The 104.00 level might be too far off, with 103.63 (55-day SMA) coming in as the next resistance.
A rejection by the descending trendline will give fuel to Greenback bears leading to a further downturn. The line in the sand here is 101.74 – the floor which held halfway through December before breaking down in the last two weeks. In case the DXY snaps this level, expect to see a test at the low near 100.80.
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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