- The US dollar is trading virtually unchanged ahead of the July PPI data.
- Carry trade and high beta currencies are resisting the US dollar.
- The US Dollar Index remains stuck to the pivotal level of 103.18.
The US Dollar (USD) is trading mixed on Tuesday, extending Monday’s small moves, with only one pattern standing out on the chart. The high beta and carry trades that were in doubt last week are outperforming the Dollar, with the Polish Zloty (PLN), Australian Dollar (AUD), New Zealand Dollar (NZD) and Czech Koruna (CZK) being the main gainers. However, these moves are not visible on the DXY chart because the US Dollar is outperforming the Japanese Yen (JPY).
On the economic data front, the calendar is starting to turn around a bit. The Producer Price Index (PPI) will be the main focus on Tuesday ahead of the release of the US Consumer Price Index (CPI) on Wednesday. Overall, a decline in PPI numbers is expected across the board, reinforcing the thesis that inflationary pressures are easing.
Daily Market Wrap: Early Data Points Ahead of CPI
- The NFIB Business Optimism Index for July will be released at 10:00 GMT. A stable reading of 91.7 is expected from 91.5 reported in June.
- At 12:30 GMT, US Producer Price Index data for July will be released:
- The monthly headline PPI is expected to rise 0.1%, slower than the 0.2% advance seen in the previous month. On an annual basis, the headline PPI is also expected to soften to 2.3% from 2.6%.
- As for underlying readings, the monthly core PPI is expected to rise 0.2%, slowing from the previous month’s 0.4% advance. The annual core PPI should fall below 3%, to 2.7%.
- At around 17:15 GMT, Federal Reserve Bank of Atlanta President Raphael Bostic will participate in a moderated discussion at the African American Financial Professionals Conference in Atlanta, United States.
- Equity markets are taking off with solid gains in Asia. The TOPIX index and the Japanese Nikkei are closing close to 3% in the green. European stocks and US futures are picking up the positive sentiment, albeit posting slightly smaller gains.
- The CME Fedwatch tool shows a 52.5% chance of a 25 basis point (bp) interest rate cut by the Fed in September versus a 47.5% chance of a 50 bp cut. Another 25 bp cut (if September is a 25 bp cut) is expected in November at 38.5%, while there is a 49.7% chance of rates being 50 bp below current levels and an 11.7% chance of rates being 75 bp lower.
- The US 10-year benchmark rate is trading at 3.91%, further away from 4%.
Dollar Index Technical Analysis: Stagnation until Wednesday
The US Dollar Index (DXY) is being torn between two forces. One element is that high beta and carry traders are regaining strength after their substantially weak performance since early August. However, the US Dollar is gaining against the Japanese Yen in the meantime. The Yen accounts for 13.6% of the DXY versus no weighting for the Australian Dollar or the Polish Zloty, which paints a picture of stagnation on the DXY chart.
Still, the first level to reclaim, which is gaining importance by the day, is 103.18, a level that held on August 2 although it was broken on August 5 in Asian hours. Once the DXY closes above that level, the next is 104.00, which was the support from June. If the DXY can get back above that level, the 200-day simple moving average (SMA) at 104.15 is the next resistance to watch.
On the downside, the oversold condition on the Relative Strength Index (RSI) indicator has eased on the daily chart and it has room for a minor decline again. The nearby support is the March 8 low at 102.35. Once overcome, pressure will start building at 102.00 as a major psychological figure before testing 101.90, which was a pivotal level in December 2023 and January 2024.
Dollar Index: Daily Chart
US Dollar FAQs
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. As of 2022, it is the most traded currency in the world, accounting for over 88% of all global foreign exchange transactions, equivalent to an average of $6.6 trillion in transactions per day. Following World War II, the USD took over from the British Pound as the world’s reserve currency.
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: to achieve price stability (control inflation) and to promote full employment. Its main tool for achieving these two goals is to adjust interest rates. When prices rise too quickly and inflation exceeds the Fed’s 2% target, the Fed raises rates, which helps 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.
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 jammed financial system. It is an unconventional policy measure used when credit has dried up because banks are not lending to each other (for 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 of 2008. It involves the Fed printing more dollars and using them to buy US government bonds, primarily from financial institutions. QE typically leads to a weakening of 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 of maturing securities in new purchases. It is generally 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.
