- The Greenback already lost over 1.6% of its value in October.
- US CPI numbers are in line, though uptick in overall inflation triggers issues.
- The US Dollar Index settles below 106 and might break above if current turnaround continous.
The US Dollar (USD) is at a crucial point in terms of positions as its summer rally quite abruptly came to a halt and took a turn for the worse. The US Dollar was unable to advance substantially on Monday when risk-off sentiment was the main theme in the aftermath of the Israel-Hamas conflict. Since then the Greenback has been retreating, and the slew of Fed speakers this week that believe the Fed is done hiking are pouring only more oil to the fire.
Traders perceived the US Consumer Price Index (CPI) numbers as a reason to sell bonds and push the US Dollar Index (DXY) back up again. Overall most of the elements fell in line of expectations. The biggest trigger was the uptick in the Overall CPI number, which means prices in food and energy are ticking up again, which are out of control of the Federal Reserve.
Daily digest: US Dollar surives another day
- US CPI numbers rattled the markets with the following numbers to digest. Overall CPI for the month rose from 0.3% to 0.4%. The monthly Core inflation, without food and energy, was steady at 0.3%. For the yearly measures the core remained unchanged at 3.7%. The core inflation dropped from 4.3% to 4.1%. It seems thus that inflation in food and energy is picking up again, and by chance those are the factors the Fed cannot controle with its policy rate.
- Additionally, the weekly jobless claims came out: initial claims remained unchanged at 209,000. Continuing claims went from 208,750 to 206,250.
- Equities are paring backing their earlier gains as the US Dollar Index soars and seems to kill any risk-on sentiment for now on the back of that CPI report.
- The CME Group FedWatch Tool shows that markets are pricing in an 88.3% chance that the Federal Reserve will keep interest rates unchanged at its meeting in November.
- The benchmark 10-year US Treasury yield is sinking lower to 4.54%. The lowest level in nearly 10 days.
US Dollar Index technical analysis: CPI saves the day
The US Dollar has started to look bleak, and any chance for a quick recovery is hanging by a thread. Only a tick up in US inflation numbers for now did the trick and will grant the DXY another day near 106. It looks inevitable that the US Dollar Index (DXY) will need to look further down in order to find ample support before having a possible recovery bounce.
For a second day in a row, the DXY opens below 106, which means that this level will be the first initial hurdle to recapture. On the topside, 107.19 is important to reach if the DXY can get a daily close above that level. If this is the case, 109.30 is the next level to watch.
On the downside, the recent resistance at 105.88 did not do a good job supporting any downturn. Instead, look for 105.12 to keep the DXY above 105.00. If that does not do the trick, 104.33 will be the best level to look for some resurgence in US Dollar strength with the 55-day Simple Moving Average (SMA) as a support level.
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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