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US Dollar steady ahead of US Consumer Price Index print later this week

Republished By Plato
Republished By Plato

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  • The US Dollar trades sideways after a whipsaw move on Friday. 
  • Traders will focus on US inflation numbers later this week. 
  • The US Dollar Index steadies around 102.00, though technical rejection on Friday points to more downturn ahead.

The US Dollar (USD) trades broadly steady on Monday after suffering a wild ride on Friday, likely hurting intraday and short-term traders. The US Dollar Index (DXY) jumped significantly higher after a strong headline number in the US Jobs report, only to fully unwind that move and sink lower on the back of very poor Employment numbers in the Institute for Supply Management (ISM) Services PMI report. Adding to the swings caused by economic data releases, traders need to revalue the US Dollar taking into account increasing geopolitical tensions and mounting expectations of interest-rate cuts by the Federal Reserve (Fed). 

On the economic front, a calm Monday is ahead with only Consumer Credit data for November due. The focus on credit numbers, loans and defaults is likely to grow in the coming months as several banks signal they are seeing more payment delinquencies. For this week, the main event will be the US inflation numbers on Thursday. 

Daily digest Market Movers: More Bond Auctions to come

  • Tensions are building up further in the Middle East after Israel claims it discovered Chinese weaponry in a Hamas depot. 
  • China’s biggest construction firm Evergrande sinks 17% in Hong Kong after reports that its Vice Chairman has been detained.
  • Tit-for-tat between China and the US, with China sanctioning five US defence industry companies after a US arms sale to Taiwan. 
  • Dallas Fed President Lorie Logan said that the Fed should begin discussing a slowdown in its balance sheet runoff. 
  • The US Treasury is taking a stab at the markets by placing a 3-month and a 6-month bill at 15:30 GMT. 
  • US Consumer Credit Change for November is due to come out at 20:00 GMT, with credit expected to jump from $5.13 billion to $9 billion. 
  • Equity markets are in the red across the board at the start of this week. Dow Jones futures are leading the decline, down near 0.50%.
  • The CME Group’s FedWatch Tool shows that markets are pricing in a 95.3% chance that the Federal Reserve will keep interest rates unchanged at its January 31 meeting. Around 4.7% expect the first cut already to take place. 
  • The benchmark 10-year US Treasury Note trades has reclaimed back the area above 4% after the wild ride on Friday. 

US Dollar Index Technical Analysis: Rates will be crucial going forward

Bets on the US Dollar look split. On the one hand, traders place bets favoring the US Dollar due to increasing geopolitical tensions in the Middle East, with ongoing headlines over the Red Sea and Chinese weaponry found in Hamas storages by Israel. On the other side, traders see reasons for quick rate cuts by the Fed after the implosion of the ISM numbers last Friday. Expect geopolitics to take over control for now, as long as new headlines point to further heightened tensions. 

In the DXY US Dollar Index, the first level on the upside is 103.00, which falls nearly in line with the descending trend line from the top of October 3 and December 8. Once broken and closed above there, the 200-day Simple Moving Average (SMA) at 103.43 comes into play. The 104.00 level might be a bit too far off, with 103.93 (55-day SMA) coming in as the next resistance on the upside.   

To the downside, the rejection on the descending trendline is giving fuel to the Greenback bears for further downturn. The line in the sand here is 101.74, the floor which held halfway through December before breaking down in the last two weeks. In case the DXY snaps this level, expect to see a test at the low near 100.80.

Fed FAQs

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money.
When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions.
The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.

In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system.
It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.

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