- USD marks a slight decline as lower US inflation further reduces its attractiveness.
- The softer but in-line CPI figures give markets reason to feed into a dovish narrative.
- Markets are still anticipating the first rate cut in September.
The US Dollar (USD), as measured by the US Dollar Index (DXY), showed a slight downward trend below the 103.00 threshold during the trading session on Wednesday. This decline follows the confirmation of lower than expected inflation in the US, which somewhat overshadowed the stable outlook for the country’s labor market.
Although market expectations regarding upcoming monetary policy decisions did not change substantially, the projection of the US economic trend still points to an above-trend growth rate. This pattern suggests that the market may be overestimating again the need for aggressive monetary easing in the future.
Daily Market Wrap: Lower US inflation reduces US dollar’s appeal
- The decline in US inflation, as measured by the Consumer Price Index (CPI), was a decisive factor in the day’s market dynamics.
- The headline CPI slowed to 2.9% year-on-year in July from June’s level of 3%, slightly below market expectations.
- Core CPI (which excludes fluctuating food and energy prices) came in at 3.2% year-on-year, up from 3.3% in July, in line with market forecasts.
- The probability of a rate cut by the Federal Reserve (Fed) in September is around 80%.
- The likelihood of future relief will depend largely on other economic indicators.
DXY Technical Outlook: Bearish outlook continues, indicators deep in negative territory
DXY technical indicators point to a persistent bearish market situation with buyers failing to generate a significant rally. The index remains anchored below the 20-, 100- and 200-day simple moving averages (SMA), reinforcing the prevailing bearish sentiment.
The RSI remains close to 30, indicating a steady selling pressure. On the other hand, the MACD indicator is stabilizing, while remaining in negative territory with lower red bars.
Support levels: 102.40, 102.20, 102.00
Resistance levels: 103.00, 103.50, 104.00
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. 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 daily transactions. 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.
