- The DXY index declined to 104.05, its lowest level since early September and below the 100-day SMA.
- The headline and core CPI from October came in lower than expected.
- Investors are expecting rate cuts sooner, betting on no more hikes by the Fed in 2023.
The US Dollar (USD) experienced a substantial downward movement in Tuesday’s session, and the DXY index, which measures the value of the US Dollar versus a basket of global currencies, tanked to 104.05 driven by a lower-than-expected CPI and dovish bets on the Fed. Focus now shifts to the Producer Price Index (PPI) and Retail Sales figures from October on Wednesday.
As the United States economy recently printed lower than expected job creation and inflation figures, markets are taking off the table a rate hike at the next Federal Reserve (Fed) meeting in December. In addition, investors are seeing rate cuts sooner, in May 2024. This has made US Treasury yields decline, thus giving the market a reason to lose interest in the US Dollar.
Daily Digest Market Movers: US Dollar weakens as soft CPI fuels dovish bets on the Fed
- The US Dollar Index dived to 104.05, down more than 1% and standing near lows not seen since September, after the report of lower inflation figures.
- The US Bureau of Labor Statistics reported that the Core Consumer Price Index (CPI) from October missed the consensus. It came in at 4% YoY vs the expected 4.1% and decelerated from its previous figure of 4.1%.
- The headline figure came in at 3.2%YoY, below the consensus of 3.3% and in relation to its last reading of 3.7%.
- US Treasury yields fell vertically with the 2-year rate declining to 4.86%, while the 5 and 10-year rates declined to 4.45% and 4.46%, respectively..
- According to the CME FedWatch Tool, the odds of a 25-basis-point hike in December are extremely low, below 10%. In addition, markets are now pricing in rate cuts in May 2024.
- On Wednesday, the US will report Retail Sales from October, which are expected to have contracted by 0.3%, while the Producer Price Index (PPI) from the same month is expected to decelerate to 1.9% YoY.
Technical Analysis: US Dollar bears gain ground and challenges the 100-day SMA
Based on the daily chart, the DXY Index has a bearish bias as indicators are flashing signs of bears seizing control. The Relative Strength Index (RSI) is trending below its midline, while the Moving Average Convergence Divergence (MACD) histogram displays rising red bars.
Despite bears gaining ground and pushing the pair below the 20 and 100-day Simple Moving Average (SMA) in the short term, the DXY is still above the 200-day SMA. This suggests that bulls are in control in the broader context.
Support levels: 104.10, 103.60 (200-day SMA), 103.30.
Resistance levels: 104.15 (100-day SMA), 104.50, 105.00.
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money.
When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions.
The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named 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 during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.