US Dollar ticks higher ahead of Retail Sales data as markets foresee shallower Fed easing cycle

By News Room Last updated Dec 17, 2024

The US Dollar edges higher after US preliminary Services PMI data suggested the economy remained strong, boosting the Greenback.
Traders gear up for US Retail Sales data as traders increasingly expect the Fed to reduce or pause its interest-rate-cutting cycle in 2025.
The US Dollar Index (DXY) orbits around 107.00 and tries to move higher.

The US Dollar (USD) trades in positive territory against most major peers in the G20 space on Tuesday, with the DXY Index holding above the 107.00 level. The Greenback is back in the graces of investors after the preliminary US Purchasing Managers Index (PMI) release for December showed that the economy expanded at the steepest pace in 33 months driven by the services sector. Meanwhile, the Federal Reserve is set to cut its policy rate on Wednesday by 25 basis points – offering a small goldilocks scenario for this week – but increasing expectations that the Fed will slow down its rate-cutting cycle in 2025 keep the USD supported.

In Europe, German Chancellor Olaf Scholz lost its vote of confidence on Monday and snap elections are set for February 23. Political instability in Germany, together with the recent woes in France, is resulting in a weaker Euro (EUR), which accounts for 57.6% of weight in the US Dollar Index (DXY).

The highlight of Tuesday’s US economic calendar is the US Retail Sales data. November and December are seasonally very retail-sensitive months due to festive holidays such as Thanksgiving and Christmas. Should Retail Sales flourish, that points to healthy consumer spending and growing activity.

Daily digest market movers: Focus on Retail Sales

Near 13:30 GMT, the November Retail Sales are due:
- The monthly Retail Sales growth is expected to jump to 0.5% from 0.4%.
- Retail Sales excluding Cars and Transportation is expected to tick up to 0.4% from 0.1% the previous month.
- Any revisions to the previous month’s data could be more market moving than the actual reading.
Around 14:15 GMT, Industrial Production for November is due. The expectation is for output to expand by 0.3%, swinging from the previous 0.3% contraction.
The National Association of Home Builders (NAHB) will release its Housing Market Index for December at 15:00 GMT. The expectation is for a tick up to 47 from 46 a month earlier.
Equities are off to a poor start on Tuesday with Asian and European indices on the back foot. US futures are showing signs of fatigue as well and are down by less than 0.50%.
The CME FedWatch Tool is pricing in another 25 basis points (bps) rate cut by the Fed at Wednesday’s meeting by 95.4%.
The US 10-year benchmark rate trades at 4.42%, a fresh three-week high.

US Dollar Index Technical Analysis: Yields going for the kill

The US Dollar Index (DXY) is ticking back up to 107.00 while under the hood of the engine, the bond complex is being torn apart. While investors are selling US bonds – which is triggering a spike in yields – the Federal Reserve is set to cut rates by 25 basis points on Wednesday. Markets are doing their own homework and are already factoring in the effect from Donald Trump’s policies, which could lead the Fed to hold rates or even hike them again in order to keep the economic boost and boom under control.

On the upside, 107.00 remains a key level that needs to be reclaimed with a firm daily close above it before considering 108.00. When and if that finally happens, the fresh two-year high at 108.07 from November 22 is the next level to watch for.

Looking down, 106.52 is the new first supportive level in case of profit-taking. Next in line is the pivotal level at 105.53 (the April 11 high), which comes into play before heading into the 104-region. Should the DXY fall towards 104.00, the 200-day Simple Moving Average at 104.19 should catch any falling knife formation.

US Dollar Index: Daily Chart

Central banks FAQs

Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.

A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.

A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.

Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.

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