- The DXY Dollar Index plummeted towards 106.00 on Wednesday.
- The US dollar fell, but its losses may be limited as markets are pricing in a more hawkish Fed.
- October PCE data met inflation expectations.
In Wednesday’s session, the US Dollar Index (DXY), which measures the value of the USD against a basket of currencies, fell 1% as markets evaluate the release of high-level economic data, including a reading of the Index of Prices of Personal Consumption Expenditure (PCE), the preferred inflation indicator of the Federal Reserve (Fed).
Daily Market Summary: US Dollar Declines Despite Persistent Inflation Data
- Even though US data indicates rising inflation, the DXY remains on the defensive.
- The market is pricing in a more hawkish stance from the Fed, which could lead to fewer cuts in the near term.
- This hawkish stance is likely contributing to the US dollar’s recent strength against other currencies.
- The data shows that the economy continues to perform well with no recession in sight.
- Third quarter Gross Domestic Product (GDP) was reported at 2.8% as expected.
- Initial Jobless Claims improved to 213K, better than expected at 217K.
- Durable goods orders rose 0.2% in October, below the expected 0.5% but up from -0.4% in September.
- The Personal Consumption Expenditure Price Index (PCE) rose 0.2% month-on-month and 2.3% year-on-year as expected. The annual core PCE figure increased by 2.8% year-on-year, also meeting forecasts.
DXY Technical Outlook: Indicators Suggest Possible Consolidation, But Uptrend Remains Intact
The Relative Strength Index (RSI) and Moving Average Convergence/Divergence (MACD) have been struggling to gain ground lately, and appeared to have given way on Wednesday when the index retreated to 106.00.
This suggests that the index could be ready for a period of consolidation. However, the index remains above its 20-day, 100-day, and 200-day Simple Moving Averages (SMA), indicating that the overall momentum remains positive. DXY is expected to find support at 106.00-106.50 and face resistance at 108.00.
The 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. 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.
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.
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.
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.
