- The US Dollar Index (DXY) fell to 104.25, its lowest level since early September.
- The headline CPI and core CPI for October were lower than expected.
- Investors expect a rate cut sooner than expected, and are betting that the Fed will not raise rates further in 2023.
He US dollar (USD) experienced a major move lower in the Tuesday session, with the Index (DXY), which measures the value of the US Dollar against a basket of global currencies, sinking to 104.25 driven by a lower-than-expected CPI and by the Fed’s dovish bets. Attention now turns to the Producer Price Index (PPI) and retail sales for October, which will be published on Wednesday.
As the US economy has just published lower-than-expected job creation and inflation figures, markets are ruling out a rate hike at the next Federal Reserve (Fed) meeting in December. Additionally, investors are seeing rate cuts sooner, in May 2024. This has caused US Treasury yields to decline, thus giving the market a reason to lose interest in the Dollar.
Daily Market Moves Summary: CPI Weakness Fuels Dovish Fed Bets
- The Dollar Index fell to 104.25, more than 1%, and was near lows not seen since September, after reporting lower inflation figures.
- The US Bureau of Labor Statistics reported that October’s core Consumer Price Index (CPI) fell short of consensus. It stood at 4% year-on-year, compared to the expected 4.1%, and decelerated from the previous figure of 4.1%.
- The headline figure stood at 3.2% year-on-year, below the consensus of 3.3% and relative to its last reading of 3.7%.
- US Treasury yields fell vertically, with the 2-year rate falling to 4.86%, while the 5-year and 10-year yields fell to 4.45% and 4.46%, respectively.
- According to CME’s FedWatch tool, the odds of a 25 basis point hike in December are extremely low, below 10%. Additionally, markets are now pricing in a rate cut in May 2024.
- On Wednesday, the US will report October retail sales, which are expected to have contracted 0.3%, while the Producer Price Index (PPI) for the same month is expected to slow to 1.9% year-on-year.
Technical Analysis: Dollar bears gain ground and threaten the 100-day SMA
On the daily chart, the DXY index is showing a bearish trend as indicators show preliminary signs that the bears are taking control. The Relative Strength Index (RSI) is trending below its midline, while the Moving Average Convergence Histogram (MACD) is showing ascending red bars.
Even though the bears gain ground and push the pair below the 20-day SMA in the near term, the DXY remains above the 100-day and 200-day SMA. This suggests that the bulls are in control in a broader context.
Support Levels: 104.15 (100-day SMA), 103.60 (200-day SMA), 103.30.
Resistance levels: 104.50, 105.00,105.30.
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. For most of its history, the US dollar was backed by gold, until the Bretton Woods Agreement of 1971, when the gold standard disappeared.
How do Federal Reserve decisions 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 securities into 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.
