- The DXY rose as high as 104.80 on Tuesday, breaking above the key resistance of the 100-day SMA.
- US Treasury yields soared as core CPI for January came in higher than expected.
- The odds of a cut in May have fallen to 40%, according to CME's FedWatch tool.
He US dollar (USD) experienced bullish momentum on Tuesday, trading at 104.80 on the Dollar Index (DXY). The Dollar was boosted by the January Consumer Price Index (CPI), which caused markets to delay the start of the Federal Reserve's (Fed) easing cycle.
After Federal Reserve Chairman Jerome Powell indicated that a cut was unlikely in March because the bank still needed additional evidence on falling inflation, higher-than-expected inflation on Tuesday benefited the US dollar, since the markets begin to consider June as the beginning of flexibility.
Daily Market Summary: January Core CPI Beats Estimates and Dollar Soars
- The US Bureau of Labor Statistics report showed a 0.4% month-on-month increase in the core inflation rate for January, surpassing consensus and previous figures of 0.3%.
- In year-on-year terms, core inflation remained at 3.9%, above the forecast of 3.7%.
- After the data was released, a rise in US Treasury bond yields was observed. Current rates put the 2-year yield at 4.60%, the 5-year yield at 4.26%, and the 10-year yield at 4.27%, benefiting the US Dollar.
- Market expectations for rate cuts based on CME's FedWatch tool for the upcoming May meeting fell to 40%, while those odds rose to 50% for the June meeting.
Technical Analysis: DXY bulls enter the scene and conquer the 100-day SMA
On the daily chart, the Relative Strength Index (RSI) is showing a positive slope and trading in positive territory, indicating strong buying momentum among investors. This reveals that the market is demonstrating a buying dominance, which supports the idea of ​​a further bullish market movement.
The moving average convergence divergence (MACD) histogram illustrates ascending green bars, reinforcing the bullish momentum painted by the RSI. This suggests that investors are showing a strong appetite for risk and are buying the asset aggressively.
In a broader context, the index is now trading above its 20-day, 100-day, and 200-day SMA, suggesting a bullish market structure. DXY's positioning above these significant SMAs reinforces the bulls' dominance on longer timeframes.
In conclusion, the technical indicators on the daily chart conclusively reflect a predominant buying momentum in the market. This, coupled with the fact that the bulls are gaining ground, means that a sustainable move in the bullish direction would more likely be the order of the day in the near future should the bulls receive additional fundamental stimulus.
US Dollar FAQ
What is the US Dollar?
The United States 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 in circulation alongside local banknotes. According to 2022 data, it is the most traded currency in the world, with more than 88% of all global currency exchange operations, equivalent to an average of $6.6 trillion in daily transactions.
After World War II, the USD took over from the pound sterling as the world's reserve currency.
How do the decisions of the Federal Reserve affect the Dollar?
The single most important factor influencing the value of the US Dollar is monetary policy, which is determined by the Federal Reserve (Fed). The Fed has two mandates: achieve price stability (control inflation) and promote full employment. Your main tool to achieve these two objectives is to adjust interest rates.
When prices rise too quickly and inflation exceeds the 2% target set by the Fed, the Fed raises rates, which favors the price of the dollar. When Inflation falls below 2% or the unemployment rate is too high, the Fed can lower interest rates, which weighs on the Dollar.
What is Quantitative Easing and how does it influence the 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 into a clogged financial system. This is an unconventional policy measure used when credit has dried up because banks do not lend to each other (for fear of counterparty default). It is a last resort when a simple lowering of 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 of 2008. It involves the Fed printing more dollars and using them to buy US government bonds, primarily from financial institutions. QE usually leads to a weakening of the US Dollar.
What is quantitative tightening and how does it influence the US dollar?
Quantitative tightening (QT) is the reverse process by which the Federal Reserve stops purchasing bonds from financial institutions and does not reinvest the principal of maturing portfolio securities in new purchases. It is usually positive for the US dollar.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
