US Dollar sinks after CPI confirms disinflation, ahead of Fed
|- The US Dollar trades weaker across the board after disinflationary CPI release.
- Traders are sending the Greenback lower, ahead of the upcoming Fed meeting.
- The US Dollar index falls below 105.00 and is even heading to the lower 104.00-region.
The US Dollar (USD) sinks lower in the US Consumer Price Index (CPI) aftermath. The move comes with all inflationary elements coming in at the low end of the expectation or even undershooting it. Main element is the monthly headline inflation which fell to 0%, where 0.1% was expected and coming from 0.3%.
On the economic front, all eyes are now on the US Federal Reserve (Fed) which is set to issue its rate decision. The Federal Open Market Committee (FOMC) will need to assess this CPI report in order to determine how they will see their dot plot forecast. That dot plot chart, or Philips curve, will be released as well later this Wednesday.
Daily digest market movers: All eyes on the dot plot now
- At 11:00 GMT, the Mortgage Bankers Association (MBA) has released the Mortgage Applications number for the week ending on June 7. The previous week, a notable decline of 5.2% was printed, with now an uprise of 15.6%.
- At 12:30 GMT, the US Bureau of Labor Statistics has released the US Consumer Price Index for May:
- Monthly core inflation came in at 0.2%, coming from 0.3%.
- Monthly headline inflation went from 0.3% to 0.0%.
- Yearly core inflation went from 3.6% to 3.4%.
- Yearly headline inflation came in a touch softer at 3.3% against 3.4%.
- All data points in the CPI report were either at the lowest estimate or even below it, making it a very soft and disinflationary report.
- Markets will digest the CPI release until 18:00 GMT, when the US Federal Open Market Committee (FOMC) will release its statement on the Federal Reserve’s interest rate decision. As markets have fully priced in an unchanged rate at 5.50%, the dot plot, where all Fed officials get to pencil in their projections and forecasts on how they see monetary policy going forward, will be more important.
- At 18:30 GMT, Fed Chairman Jerome Powell will take the stage and deliver a speech with questions and answers on the recent monetary policy decision.
- Equities are going through the roof with markets now betting again on a rate cut for 2024 from the Fed. All European and US indices are in the green.
- The CME FedWatch Tool shows a 47.4% chance of Fed interest rate at the current level in September. Odds for a 25 basic points rate cut stand at 48.3%, while a very slim 4.3% chance is priced in a 50 basic points rate cut
- The benchmark 10-year US Treasury Note slides to the lowest level for this week, near 4.28%,the lowest level in nearly a month.
US Dollar index Technical Analysis: Will Powell confirm soft landing
The US Dollar index (DXY) is set to either trade another leg higher or to erase all weekly gains with the US CPI and Fed decision as main drivers on Wednesday. Although, one scenario might be playing out which would result in an actual standstill for the US Dollar. That would be if the disinflation is still on track with CPI coming in softer than expected, being contradicted later on with the Fed rate decision where Fed Chairman Jerome Powell could turn hawkish and say that the Fed will need to stay steady for longer in order to really get inflation where they want it to be.
On the upside, there are some technical or pivotal levels to watch out for. The first is 105.52, a level that held support during most of April. The next level to watch is 105.88, which triggered a rejection at the start of May and will likely play its role as resistance again. Further up, the biggest challenge remains at 106.51, the year-to-date high from April 16.
On the downside, a trifecta of Simple Moving Averages (SMA) is now playing as support. First, and very close, is the 55-day SMA at 105.07. A touch lower, near 104.48, both the 100-day and the 200-day SMA are forming a double layer of protection to support any declines in the US Dollar index. Should this area be broken down, look for 104.00 to salvage the situation.
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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