US Dollar takes a breather with CPI in sight
- Traders exhibit caution following below-forecast US PPI figures that spark fresh inflation debates in global markets.
- President-elect Donald Trump’s potential remarks on tariffs and trade policies keep investors vigilant, unsure of the Dollar’s immediate trajectory.
- The Federal Reserve’s steady rate stance for January remains likely, but any inflation surprises could sway policy expectations again.
The US Dollar Index, which measures the value of the USD against a basket of currencies, is on the backfoot after the December Producer Price Index (PPI) was released. Traders are on edge over possible comments from President-elect Donald Trump on the above headline. The US Dollar Index (DXY) dips below 110.00 and looks for support to bounce back.
Daily digest market movers: USD eases on hot NFP report momentum as PPI disappoints
- December’s Producer Price Index (PPI) was softer than anticipated: core monthly PPI at 0.0% vs. 0.3% expected, headline at 0.2% vs. 0.3%, and yearly readings coming in below forecasts.
- The US Dollar weakened on this report, but analysts remain confident in the ongoing rally and view the tariff noise as short-lived.
- Inflation concerns persist, with sticky underlying price pressures suggesting the Federal Reserve (Fed) will retain its cautious easing pace into 2025.
- Yield softening sees the 10-year benchmark slip to around 4.80% from its 14-month high, reflecting market uncertainty post-PPI.
- CME FedWatch Tool shows that traders have already priced in the chance of unchanged rates at January’s meeting, underscoring the Fed’s data-dependent posture and potential Trump-driven volatility.
DXY technical outlook: Respite after softer data, but structure remains positive
The US Dollar Index witnessed a temporary dip below the 110.00 mark, pressured by profit-taking and underwhelming PPI numbers. Despite this pullback, the broader uptrend stays intact, hovering near multi-year highs. Indicators show a mild slowdown, hinting at a potential short-term consolidation phase. If profit-taking intensifies, the index may slip further, probably towards 107.00-108.00; however, strong fundamentals and robust Fed guidance suggest the Dollar could quickly find a bid, preserving its longer-term bullish bias.
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.
Author
Patricio Martín
FXStreet
Patricio is an economist from Argentina passionate about global finance and understanding the daily movements of the markets.
