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- US Dollar adds on gains following hot CPI figures
US Dollar adds on gains following hot CPI figures
- Core and Headline CPI rose higher than expected in February.
- Despite higher inflation, weak labor market data reported last Friday would seem to limit the USD’s gains.
- Expectations still point toward the interest rate easing cycle starting in June.
The US Dollar Index (DXY) is currently trading slightly higher at 103.05. Despite the report of hot US Consumer Price Index (CPI) figures, the index stands near its December lows.
After The US labor market showed mixed figures for February, the hot CPI figures failed to trigger major changes in expectations. Markets still expect 75 bps of easing in 2024 by the Federal Reserve (Fed) starting in June.
Daily digest market movers: DXY gains ground on hot CPI figures
- In February, US inflation, measured by the Consumer Price Index (CPI), rose by 3.2% on a yearly basis vs the rise of 3.1% in January.
- The Annual Core CPI, which excludes volatile food and energy prices, also saw an increase, rising to 3.8% in February. However, this was below the January increase of 3.9%.
- US Treasury bond yields are climbing with the 2-year yield at 4.60%, the 5-year yield at 4.14%, and the 10-year yield at 4.15%.
DXY technical analysis: DXY bulls step in, outlook still negative
The technical outlook shows an escalating bullish momentum. The continuous escalation highlighted by the Relative Strength Index (RSI) portrays a more pronounced buying momentum despite it being in negative territory, indicative of a potential bullish market reversal. This in combination with the decreasing red bars of the Moving Average Convergence Divergence (MACD) suggests that the selling pressure is marginally declining.
However, the dynamics change when viewed through the lens of the larger context, where the index is still under the 20, 100, and 200-day Simple Moving Averages (SMAs). This placement reflects that bears have been exhaustively active in market dominance, exerting sustained downward pressure on the DXY, which took the Index to December lows.
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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