US Dollar turns positive as dust settles on US CPI print
- The US Dollar turns green at the end of the European session.
- Dust settles on CPI and confirms one more hike from the Fed.
- The US Dollar Index turns green and turns this week into positive territory.
The US Dollar (USD) is heading higher after the most recent US Consumer Price Index (CPI) print. The Greenback is looking for direction as traders and analysts are looking for a consensus on how to read the latests numbers. One thing though that is clear is that the recent CPI print does not let the US Federal Reserve cut anytime soon.
As mentioned already earlier, traders have focused on the core inflation element without food and energy, which has declined from 4.7% to 4.3%. The markets are ignoring the fact that energy turns back into an inflationary force as the overall index is turning higher from 3.2% to 3.7%.
Daily digest: US Dollar jumps
- Ahead of the US inflation numbers, on the other side of the Atlantic Ocean traders have cemented the possibility of one more hike from the ECB for 2023, where just a few days ago hikes were no longer expected.
- The US session will kick off at 11:00 GMT with the Mortgage Bankers Association (MBA) printing its Mortgage Applications for the week of September 8. The Index went from -2.9% to -0.8%.
- The biggest chunk of data came out at 12:30 GMT with the US Consumer Price Index (CPI) for August in all its forms and time frames: Overall Year-over-Year inflation went from 3.2% to 3.7% with month-over-month from 0.2% to 0.6%. THe core inflation, without food and energy, went on a yearly basis from 4.7% to 4.3%. The monthly measure went from 0.2% to 0.3%.
- Back to the normal schedule for Wednesday: around 14:30 GMT the US Energy Information Administration (EIA) will give its latest number for the crude stockpile movements. Expectations are for a smaller drawdown from 6.307 million to 1.912 million barrels less.
- Expect to see yields being supported again with this time a 30-year bond auction due to be placed in the markets near 17:00 GMT from the US Treasury department.
- Equities are going nowhere and await US inflation numbers.
- The CME Group FedWatch Tool shows that markets are pricing in a 93% chance that the Federal Reserve will keep interest rates unchanged at its meeting in September.
- The benchmark 10-year US Treasury bond yield trades at 4.28% and remains elevated even after the step back on Monday.
US Dollar Index technical analysis: Fed hike in focus
The Greenback heads higher as markest are gearing up for another rate hike from the Fed. It appears that markets first jumped on the weaker yearly core inflation element and sent the US Dollarindex (DXY) lower. As the dust settles, it appears that inflation is actually steady to a bit higher with energy back in inflationary territory, and might see the DXY flip back in the green later in the US session this Wednesday.
The new high to watch is at 105.16, both the high from last Thursday and the six-month high. The US Dollar Index first needs to gain back its lost territory from this Monday and break above the high of 104.93. Beyond 105.16, the next level to watch is 105.88, the high of 2023.
On Monday, 104.44 kept it together and refrained from allowing the DXY from selling off any further. The high of August 25 did its job and acted as a pivotal level. Should the uptick from this Tuesday reverse and 104.44 gives way, a substantial downturn could take place to 103.04, where the 200-day SMA comes into play for support.
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.
Author
Filip Lagaart
FXStreet
Filip Lagaart is a former sales/trader with over 15 years of financial markets expertise under its belt.
