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- US Dollar trades with mild losses ahead of Retail Sales data, Treasury yields continue to rise
US Dollar trades with mild losses ahead of Retail Sales data, Treasury yields continue to rise
- Incoming data continues to influence easing cycle expectations with June as a potential start.
- Despite US CPI data intensifying, investor foresight accords more with frail labor market figures.
- Retail Sales and weekly Jobless Claims figures will dictate the pace of the USD for the rest of the week.
The US Dollar Index (DXY) exchanges hands at 102.80, recording mild losses. Despite hot figures from the latest Consumer Price Index (CPI) release, investors' expectations for the start of the Federal Reserve’s (Fed) interest rate cuts didn’t see major changes. Weighed down by a weak labor market, investors are holding their breath for the upcoming data on Retail Sales, awaiting further cues on the health of the US economy.
As for now, due to some weaknesses detected in the US labor market, investors may post their focus on the Unemployment evolution to time the start of the rate cuts. Additionally, any weakness in US economic activity may take the focus off the rise in February inflation.
Daily digest market movers: DXY trades evenly in anticipation of additional US data
- The February US Consumer Price Index (CPI) data demonstrates an unexpected rise in inflation. The headline YoY increase was 3.2% against the previous 3.1%, while core CPI rose by 3.8% on a yearly basis, in contrast to January's 3.7%.
- Upcoming US economic reports on Thursday include the Producer Price Index (PPI), expected to have risen by 1.2% YoY compared to 1.9% in January.
- Retail Sales and weekly Initial Jobless Claims will also be closely studied.
- Fed is projected to uphold current rates in the upcoming meeting in March with a mere 15% likelihood of a rate reduction in May and a slightly more probable 75% chance in June.
- The market continues to foresee an additional three rate cuts in 2024, however, a hawkish swing in the forthcoming March Dot Plot may change those forecasts.
- US Treasury bond yields are ascending with the 2-year at 4.61%, the 5-year at 4.17%, and the 10-year at 4.18%.
DXY technical analysis: DXY bears resume their path, bearish SMA crossover spotted at 103.70
Considering the technical indicators on the daily chart, selling momentum looks to be dominating the market at the moment. The Relative Strength Index (RSI), although flat, is hovering in negative territory, which signifies a bearish stand. However, the selling pressure seems to have been reduced for now as bears take a breather.
The Moving Average Convergence Divergence (MACD) is also flat with red bars, which reflects the prevailing bearish momentum but insinuates that the selling force might be losing some steam after a 1% pullback last week.
In addition, the Index is trading below the 20, 100, and 200-day Simple Moving Averages (SMAs), confirming bearish sentiment in the market. To add to that, the 20-day SMA performed a bearish cross with the 100 and 200-day averages at 103.70, which adds an argument to the negative outlook for the USD.
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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