US Dollar extends gains on the back of rising yields, hawkish bets on the Fed
- The US Dollar extended daily gains, and the DXY approached weekly highs.
- US headline CPI from September came in higher than expected, while the core measure matched expectations.
- Short-term US Treasury yields are also recovering, approaching weekly highs.
The US Dollar (USD), measured by the DXY US Dollar Index, traded by more than 0.70% during the American session and jumped to 106.50. Hawkish bets on the Federal Reserve (Fed) after the release of September’s Consumer Price Index (CPI) data from the US are the main responsible for the green currency's strength. A cautious market mood amid the conflict in Israel is also favouring to investors to seek refuge on the USD.
The United State's economy is showing signs of running hot, and the higher-than-expected figures seen in the release of the Consumer and Producer Price Index from September, reminded investors that the Fed is still data-dependent and that, in this case, they could consider another hike in the remainder of the year to combat inflation.
Daily Digest Market Movers: US Dollar extends gains against its rivals as markets brace for another hike
- The DXY US Dollar Index extended gains towards 106.70, seen more than 0.70% gains.
- The US Consumer Price Index (CPI) registered a 3.7% YoY increase in September, surpassing the market consensus of 3.6% and aligning with the previous monthly figure. In contrast, the Core measure reported a 4.1% YoY rate, meeting expectations and slowing down from the prior 4.3% YoY.
- U.S. bond yields significantly rose with the 2-year yield climbing to 5.07% and the 5-year and 10-year rates to 4.69% making the USD gain interest.
- According to the World Interest Rates Possibilities (WIRP) tool, the odds of a 25 basis point hike (bps) by the Federal Reserve rose to nearly 50% for the December meeting.
Technical analysis: US Dollar Index’s gains additional momentum above the 20-day SMA
The US Dollar DXY Index continues to show a short-term technical outlook that leans towards neutrality with a bearish bias, as observed in the daily chart. To gain control, buyers must establish robust support above the 20-day Simple Moving Average (SMA), although they will encounter resistance from the bears who recently gained significant momentum. Traders should observe the hourly chart as the Relative Strength Index (RSI) flashes overbought conditions meaning that a healthy technical correction may be on the horizon.
Supports: 106.00 (20-day SMA), 105.80, 105.50.
Resistances: 107.00, 107.30, 107.50.
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
Patricio Martín
FXStreet
Patricio is an economist from Argentina passionate about global finance and understanding the daily movements of the markets.
