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- US Dollar posts modest gains while traders commemorate MLK holiday, markets digest US inflation
US Dollar posts modest gains while traders commemorate MLK holiday, markets digest US inflation
- The DXY Index trades mildly higher at around 102.60.
- Markets will remain quiet on Monday as US traders are on the sidelines celebrating MLK’s holiday.
- Investors digest last week’s inflation data from the US from December.
The US Dollar (USD) is enjoying slight gains with the DXY Index trading at 102.60, while US traders celebrate Martin Luther King Jr.’s holiday. No relevant highlights are expected in the session, and markets are still digesting last week’s US inflation readings from December.
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, and the soft PPI readings gave markets a reason to bet on a less aggressive approach.
Daily digest market movers: US Dollar registers mild gains after CPI releases
- Last week, 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%.
- US Producer Price Index (PPI) for final demand rose by 1% on a yearly basis in December, slightly below market expectations of 1.3% and up from the revised 0.8% increase in November.
- The annual core PPI, which excludes volatile food and energy prices, increased by 1.8% in December, falling below both the November reading and analysts' estimates of 2% and 1.9%, respectively. The monthly core PPI remained unchanged for the third consecutive month.
- As for now, The CME FedWatch Tool shows that the odds of rate cuts in March and May remain elevated at 70% and 66%, respectively.
- This week the US will release Retail Sales figures from December and the Fed’s Beige Book, which may have an impact on those expectations.
Technical Analysis: DXY gets some traction, outlook is not yet bullish
From a technical analysis standpoint, the daily chart reflects that the index gained some traction. The positive slope in the Relative Strength Index (RSI) within positive territory suggests an increase in buying pressure. This optimistic aspect is echoed by the Moving Average Convergence Divergence (MACD) with its flat green bars pointing to a stabilization in bullish sentiment.
However, the index remains above the 20-day Simple Moving Average (SMA) but below the 100 and 200-day SMAs. This underpins a sense of bearish dominance in the broader trend, but bears need to raise their game to regain short-term control as the bulls have managed to keep the pair above the shorter-term SMA. Therefore, in the short-term technical outlook, it appears the bullish momentum has an upper hand despite bearish undertones due to the position on longer-term SMAs.
Support levels: 102.30, 102.00 (20-day SMA), 101.80.
Resistance levels: 102.70, 102.80, 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.
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