- The US Dollar rallies on the back of strong January inflation numbers.
- Fed Chairman Jerome Powell heads into his second day at Capitol Hill.
- The US Dollar Index (DXY) shoots higher and heads to 108.50 in the CPI aftermath.
The US Dollar Index (DXY), which tracks the performance of the US Dollar (USD) against six major currencies, heads higher in the fallout of the January Consumer Price Index (CPI) release which came in as an upbeat surprise. During his first testimony at Capitol Hill facing law makers, Federal Reserve (Fed) Chairman Jerome Powell did not leave many clues about the timing for another interest rate cut by the central bank, if any. Traders are mulling what to do next, with US yields slowly but surely starting to head higher this week.
The economic calendar is gearing up for Fed Chairman Jerome Powell who will give a speech for the second day in a row at Capitol Hill. In addition, several more Fed speakers are set to speak. Atlanta Fed President Raphael Bostic and Fed Governor Waller are set to make comments as well.
Daily digest market movers: Inflation back with a vengeance
- The US Consumer Price Index data for January has been released:
- The monthly headline CPI measure came in at 0.5%, beating the 0.3% estimate and coming from 0.4% in the previous month.
- The monthly core inflation gauge jumped to 0.4%, above the 0.3% expectations and compared to 0.2% in December.
- The stronger inflation numbers fuels higher US rates and, in turn, trigger a stronger US Dollar (USD)
- At 15:00 GMT, Fed Chairman Jerome Powell will start his second day of testimony at Capitol Hill.
- At 17:00 GMT, Federal Reserve Bank of Atlanta President Raphael W. Bostic gives remarks at the Atlanta chapter of the National Association of Corporate Directors.
- At 22:05 GMT, Federal Reserve Governor Christopher Waller is set to speak at “A very Stable Conference: Stablecoin Infrastructure for Real World Applications” in San Francisco, California.
- Equities are diving lower on the back of the US CPI release. With yields higher, equities are taking a step back and are diving lower by rougly 1% on average.
- The CME FedWatch tool projects a 95.5% chance that the Fed will keep interest rates unchanged at its next meeting on March 19.
- The US 10-year yield shoots higher to 4.63%, ticking up further for a third day in a row and recovering further from its fresh yearly low of 4.40% printed last week.
US Dollar Index Technical Analysis: Silence is golden
The US Dollar Index (DXY) is stuck in a game of Cluedo, and detective Fed Chairman Powell is not giving away much to nearly no clues. With traders left clueless about what or when the Fed will make its next move, slowly but surely, bonds are getting back in the graces of traders as a safe place to be in periods of uncertainty. With this, the US Dollar should solely but surely see some inflow and tick higher.
On the upside, the first barrier at 109.30 (July 14, 2022, high) was briefly surpassed but did not hold last week. Once that level is reclaimed, the next level to hit before advancing further remains at 110.79 (September 7, 2022, high).
On the downside, 107.35 (October 3, 2023, high) is still acting as strong support after several tests last week. In case more downside occurs, look for 106.52 (April 16, 2024, high), 106.21 (100-day Simple Moving Average), or even 105.89 (resistance in June 2024) as better support levels.
US Dollar Index: Daily Chart
Fed FAQs
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.
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