US Dollar gets repriced for a Fed cut in the fall

The US Dollar trades stronger after PPI was a beat on all fronts.
Traders see US Jobless Claims declining.
The US Dollar Index trades above 103.00, and extends gains while equities roll over

Filip Lagaart FXStreet

The US Dollar (USD) trades in the green on Thursday after both US Retail Sales for February and Producer Price data got released. It was the Producer Price release which had the last say in where the Greenback would go. With a firm beat in both the Headline and the Core measures, traders are starting to get nervous that June might become an uncertainty for that initial rate cut from the US Federal Reserve.

On the economic data front, the dust can start to settle on the disappointment from the PPI numbers. From now on look for the Greenback to rally further once the European session is set to close and the US session takes over completely. Traders meanwhile will be looking ahead for the Industrial Production and University of Michigan numbers on Friday.

Daily digest market movers: Push and pull part 305

A big list of data to released near 12:30 GMT:
- Weekly Jobless Claims:
  - Initial Claims came in lower from 210,000 to 209,000.
  - Continuing Claims headed from 1.794 million to 1.811 million.
- US Retail Sales for February:
  - Monthly Retail Sales went from a resived -1.1% to 0.6%, below the estimate of 0.8%.
  - Monthly Retail Sales without Cars and Transportation jumped from -0.8% to 0.3%, where 0.5% was expected.
- US Producer Price Index (PPI) for February:
  - The monthly Headline PPI jumped from 0.3% to 0.6%.
  - The Yearly Headline PPI rallied from 1% to 1.6%.
  - The monthly Core PPI declined from 0.5% to 0.3%.
  - The Yearly Core PPI remained stable at 2.00%.
The January Business Inventories data fell from 0.4% to 0.0%.
Equities are rolling over on the hot PPI print and are giving up all their gains from this Thursday in both Europe and the US.
According to the CME Group’s FedWatch Tool, expectations for a Fed pause in the March 20 meeting are at 99%, while chances of a rate cut stand at 1%.
The benchmark 10-year US Treasury Note trades around 4.29%, extending gains for this Thursday and last week. Overall in the bond space yields are soaring.

US Dollar Index Technical Analysis: Disappointment all around

The US Dollar Index (DXY) is trading higher and is flirting with a break above 103.00 after the upside surprise in all elements on the Produce Price data. Markets were geared up for rather a confirmation of further disinflation, which seems not to be the case. Question will start to arise now if June is still possible and a pushback could be at hand seeing the tighter window in which data needs to start convincing the US Federal Reserve that the timing is right for that initial rate cut.

On the upside, the first reclaiming ground is at 103.38, the 55-day SMA. Not far above, a double barrier is set to hit with the 100-day SMA near 103.68 and the 200-day SMA near 103.70. Depending on the catalyst that pushes the DXY upwards, 104.96 remains the key level on the topside.

The DXY was unable to even test or challenge the 55-day SMA after the CPI print. More downside looks inevitable with 102.00 up next, which bears some pivotal relevance. Once through there, the road is open for another leg lower to 100.61, the low of 2023.

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.

GBP/USD hits multi-week tops around 1.3560

GBP/USD gathers fresh steam and advances to new three-month peaks near the 1.3560 zone on Friday. Cable’s sharp move higher comes after three daily drops in a row and follows the increasing selling pressure hurting the Greenback.

EUR/USD pops to fresh two-month highs, targets 1.1600

EUR/USD advances markedly, revisiting the upper 1.1500s for the first time since mid-June. The pair’s sharp uptick comes on the back of a strong retracement in the US Dollar amid BoJ intervention chatter and despite steady uncertainty in the Middle East.

Gold picks up pace, approaches $4,400

Gold rebounds toward the $4,400 mark per troy ounce on Friday, reversing the previous day’s pullback. The precious metal’s recovery comes as fresh and intense weakness keep weighing on the US Dollar, while traders keep assessing easing expectations of an imminent Fed interest rate hike and the situation from the Middle East.

Pi Network Price Forecast: PI extends consolidation as bulls eye $0.10

Pi Network (PI) price holds steady on Friday, maintaining a consolidating tone for three consecutive days. Mild retail strength in the PI token remains stable, with Open Interest above $9 million, while social buzz eases. PI token’s technical outlook is mixed, as bearish momentum wanes to neutral, with bulls eyeing the $0.1000 psychological level.

Weekly focus: Some relief in US inflation concerns

Actual inflation data for July came out as expected with a 0.1% m/m increase in headline CPI and 0.2% excluding food and energy. Annual headline inflation remains too high at 3.4% and means that wage earners are experiencing stagnating spending power at best, and core inflation is a bit higher than the inflation target of two percent would suggest.

Why is Crude Oil priced for a reopening the ships haven't made?

Fourteen vessels crossed the Strait of Hormuz on Tuesday. Before the war, the count ran near 120 a day. In the sessions since the waterway was publicly declared open, Brent has drifted back to $87 and West Texas Intermediate (WTI) to $81, both a little lower again on Wednesday, with daily momentum on each unwound from the top of its range in late July to the low twenties now.