US Dollar advances on the back of rising US Treasury yields following January's CPI figures

The DXY rose to 104.80 on Tuesday, past the key resistance of the 100-day SMA.
US Treasury yields soared as January’s Core CPI came in higher than expected.
The odds of a cut in May have fallen to 40%, according to the CME FedWatch Tool.

The US Dollar (USD) witnessed an upward thrust on Tuesday, trading at 104.80 on the Dollar Index (DXY) reaching its highest level since mid-November. The Greenback was boosted by January's Consumer Price Index (CPI), which made markets delay the start of the Federal Reserve’s (Fed) easing cycle.

After Jerome Powell, the Federal Reserve Chair indicated that a cut in March was unlikely due to the bank still needing additional evidence on falling inflation, higher inflation than expected on Tuesday benefited the US Dollar as markets begin to eye June as the start of easing.

Daily digest market movers: US Dollar soars as Core CPI from January comes in higher than expected

Reports by the US Bureau of Labor Statistics showed a 0.4% MoM increase in the Core inflation rate for January, surpassing the consensus and previous figures of 0.3%.
On a YoY basis, Core inflation remained steady at 3.9%, maintaining the previous numbers but outdoing the forecasted 3.7%.
A rise in the US Treasury bond yields was observed following the data. Current rates place the 2-year yield at 4.60%, the 5-year yield at 4.26%, and the 10-year yield at 4.27%, which benefits the US Dollar.
Market expectations for rate cuts based on the CME FedWatch Tool for the next May meeting dropped to 40%, while those odds rose to 50% for the June meeting.

Technical analysis: DXY bulls step in and conquer the 100-day SMA

On the daily chart, the Relative Strength Index (RSI) exhibits a positive slope and trades in positive territory, indicating a strong buying momentum among investors. This reveals that the market is demonstrating buyer dominance, supporting the notion of further upward market movement.

The Moving Average Convergence Divergence (MACD) histogram illustrates rising green bars, reinforcing the bullish momentum painted by the RSI. This suggests that investors are displaying a strong risk appetite and are buying the asset aggressively.

In a broader context, the index is now trading above its 20, 100, and 200-day Simple Moving Averages (SMAs), suggesting a bullish market structure. The position of the DXY above these significant SMAs bolsters the dominance of bulls on larger time frames.

In conclusion, the technical indicators on the daily chart conclusively reflect a prevalent buying momentum in the market. This, coupled with the fact that bulls are gaining ground, means a sustainable move in the upward direction would more likely be the order of the day in the foreseeable future in case bulls receive additional fundamental stimulus.

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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