US Dollar steadies after US inflation data fails to move the needle

Most Recent Article: US dollar trades lower as investors factor in US CPI and potential dovish stance from the Fed

  • The US Dollar is steady after its earlier retreat in European trading hours.
  • Investors see CPI data as not surprising and decide to keep ammunition for the Fed meeting on Wednesday.
  • The US Dollar Index trades at 104.00 and could still flip in the green.

The US Dollar (USD) steadies after US yearly core inflation cemented at 4% as expected, a level that still doubles the objective of being near or below 2%. The US Federal Reserve (Fed) and its Chairman Jerome Powell thus will have their work cut out to contradict market expectations that cuts might come soon. Policymakers will need to make clear to markets that the inflation objective needs to be met before starting to dream of any goldilock cuts.  

On the economic front, the main takeaway is the yearly core inflation element in the Consumer Price Index (CPI) release. The annual core CPI came in at 4%, unchanged from the previous month. On a monthly basis, headline and core monthly inflation ticked up by 0.1% and 0.3%, respectively. US inflation is thus not decelerating as quickly as in Europe, where inflation is rapidly unwinding. 

Daily Digest Market Movers: CPI meets expectations

  • The US Consumer Price Index release for November bared no surprises:
    • Monthly headline inflation went, as expected, from 0% to 0.1%.
    • Monthly core inflation went from 0.2% to 0.3%.
    • Yearly headline inflation declined from 3.2% to 3.1%.
    • Yearly core inflation still stuck at 4%.
  • Around 18:00 GMT, the US Treasury will allot a 30-year bond auction. 
  • Equities are slowely but surely heading into the green with CPI numbers out of the way now. 
  • The CME Group’s FedWatch Tool shows that markets are pricing in a 98.4% chance that the Federal Reserve will keep interest rates unchanged at its meeting on Wednesday.  
  • The benchmark 10-year US Treasury Note trades near 4.19%.

US Dollar Index Technical Analysis: Wednesday fireworks

The US Dollar is gearing up for the first of two volatile days ahead, with US Consumer Price Index numbers this Tuesday and a Federal Reserve meeting on Wednesday. Expect to see some moves on the back of the US CPI numbers, though nothing substantial, as traders will want to hear from the Fed to see if markets are right in pricing in early rate cuts for 2024, or rather need to push those cuts further down the line. In that last case, the DXY US Dollar Index could jump above 104.00. 

The DXY is retreating a touch, below 104.00, though an uptick in inflation might already move the needle in favor of the US Dollar. The DXY first needs to confirm its upward move by breaking above Friday’s high at 104.26. Once from there, the 100-day Simple Moving Average (SMA) near 104.55 looks very appealing before Wednesday’s Fed meeting. 

To the downside, the 200-day SMA at 103.55 has done a tremendous job in supporting the DXY, with buyers coming in below 103.56 and pushing it back towards that same level near the US closing bell. If it fails this week, the lows of November near 102.46 is the next level to watch. More downside pressure could bring into view the 100.00 marker, particularly if US yields sink below 4%.

(This story was corrected on December 12 at 15:40 GMT to say, in the first paragraph, that US core inflation steadied at 4%, not headline inflation. It was also corrected to reflect that core inflation increased 0.3% on a monthly basis, not 0.1%.)

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.

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