US Dollar Index (DXY) consolidates around 98.50 with US CPI on tap
- The Dollar treads water around 98.50 with all eyes on the US Consumer Price Index.
- The market consensus anticipates higher inflationary pressures that might put Fed cuts into question.
- Soft inflation data is likely to increase risk appetite and send the USD lower.
The US Dollar remains fairly steady on Tuesday, following a 0.4% recovery on the previous two trading days. The immediate bias remains negative, but investors are waiting for the US CPI data for a more accurate assessment of the Fed's monetary policy, which is likely to determine the Greenback’s near-term direction.
The market consensus anticipates hotter price pressures in July, with the headline inflation rising to a 2.8% yearly rate, from 2.5% in June, and the core inflation hitting five-month highs at 3%.
The US Dollar bides its time ahead of US inflation data
Investors remain wary of higher-than-expected figures, which would confirm that Trump’s higher tariffs have reached Main Street. This might dampen hopes of Fed cuts in September, which are priced at nearly 90% at the moment, providing additional support to the US Dollar.
Previous US macroeconomic releases have revealed a softer-than-expected labour market, triggering diverse messages from the central bank’s officials calling for interest rate cuts. Beyond that, Trump is expected to nominate loyalist doves for the vacancies left by Governor Adriana Kugler and Chairman Powell, which has contributed to raising hopes of a less hawkish Fed.
A low inflation report, on the contrary, would ease concerns about the impact of tariffs and might pave the Fed’s path for a September cut. This option would trigger some risk appetite and might increase bearish pressure on the US Dollar.
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact 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 when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
Author
Guillermo Alcala
FXStreet
Graduated in Communication Sciences at the Universidad del Pais Vasco and Universiteit van Amsterdam, Guillermo has been working as financial news editor and copywriter in diverse Forex-related firms, like FXStreet and Kantox.
