US Dollar stuck in a rut while traders prepare for US CPI on Thursday

  • The US Dollar stuck in tight range ahead of Thursday's big data dump. 
  • Traders are on the lookout for any guidance from Fed’s Williams.
  • The US Dollar Index remains above 102.00, clinging on to weekly gains. 

The US Dollar (USD) trades in a tight range with markets fretting over the upcoming US inflation numbers. Traders will want to stay out of the market ahead of the main event on Thursday when the US inflation will be printed in the form of the Consumer Price Index (CPI) numbers. Expectations have never been higher as another slowdown in the numbers will make the Federal Reserve (Fed) more likely to cut interest rates sooner, rather than later, and vice versa.  

On the economic front, rather a light calendar with the only notable point the upcoming speech from New York Federal Reserve President John Williams. Known to be a very neutral person, in regards to his stance at the Federal Open Market Committee (FOMC), any hawkish or dovish comments could trigger a market reaction. He is due to speak near 20:15 GMT this Wednesday. 

Daily digest market movers: Light calendar ahead of CPI

  • At 12:00 GMT, the Mortgage Bankers Association (MBA) has released its weekly Mortgage Applications number. The last week of December registered -10.7% with a positive 9.9% for the first week of January. 
  • Near 15:00 US Wholesale Inventories was due to be released. The outcome was a steady -0.2% for November, which was in line of expectations. 
  • The US Treasury is heading to markets yet again, for a 10-Year Note Auction near 18:00 GMT.
  • Main event for this Wednesday will take place around 20:15 GMT with a speech from New York Fed member John Williams. 
  • Equity markets are mixed again on Wednesday, with Japan soaring further while its Nikkei prints new all-time highs. China is coming off worse with negative results while traders await further stimulus packages from the Chinese government before buying into Chinese equities. European and US equities are in the green, overall 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 holds near 4%, with pressure building for rates to decline. This could mean that the US Dollar is set to weaken soon.

US Dollar Index Technical Analysis: Nothing to see here for the next 24 hours 

The US Dollar is coming to a halt after printing a nice profit on Tuesday, according to the US Dollar Index (DXY). While those gains are reversing again this Wednesday, it is becoming clear that the DXY will go nowhere until the main event of this week, the US CPI print on Thursday. No big waves are expected this Wednesday, unless a catalyst pops up and shakes the tree by surprise. 

The first level to watch on  the upside is 103.00, which falls nearly in line with the trend line from the top of October 3 and December 8. If broken and closed above, the 200-day Simple Moving Average (SMA) at 103.43 comes into play. The 104.00 level might be too far off, with 103.78 (55-day SMA) coming in as the next resistance.   

To the downside, a rejection by the descending trendline will give fuel to Greenback bears leading to a 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

What does the Federal Reserve do, how does it impact the US Dollar?

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.

How often does the Fed hold monetary policy meetings?

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.

What is Quantitative Easing (QE) and how does it impact USD?

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.

What is Quantitative Tightening (QT) and how does it impact 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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