US Dollar back on Monday's levels with markets erasing inflation hiccup

The US Dollar snaps below first important support .
Markets are selling the Greenback on weaker Retail Sales.
The US Dollar Index could dip to 104 before finding ample support.

The US Dollar (USD) is accelerating the trimming of its weekly gains, which got booked on Tuesday in the aftermath of the red hot inflation report. Several analysts and economists were quick to write off the report as a one-off, with even US Federal Reserve member Austan Goolsbee saying that markets should not take into account only this Consumer Price Index (CPI) number. The disinflationary pathway to rate cuts is still very much intact and a cut is on the horizon.

On the economic data front, Retail Sales is confirming what US Fed member Austan Goolsbee said when it comes to the whole picture of the US economy. The US inflation print on Tuesday was a bit of an outlier, while the disinflationary path is still ongoing. The decline in Retail Sales is matching that idea.

Daily digest market movers: Inflation digested

The first big batch for this Thursday has been released:
Retail Sales for January:
- Monthly Retail Sales went from a revised down 0.4% to -0.8%
- Monthly Retail Sales without cars went from 0.4% to -0.6%.
- The December number was revised from 0.6% to 0.4%.
NY Empire State Manufacturing Index for February is having a steep recovery, heading from -43.7 to -2.4.
The Philadelphia Fed Manufacturing Survey even jumps back into growth numbers, heading from -10.6 to 5.2.
The Import/Export Price Index for January have been released as well:
- The Monthly Import Price Index went from -0.7% to 0.8%.
- The Yearly Import Price Index contracted 1.6% in December en stays in contraction by 1.3% for January.
- The Monthly Export Price Index went from -0.7% to 0.8%.
- The Yearly Export Price Index dropped by 3.2% in the previous month, and recovered a touch by -2.4%.
Weekly Jobless Claims have been published as well:
- Initial Claims Previous was at 218,000 and got revised to 220,000, with 212,000 as the new number for this week.
- Continuing Jobless Claims went from 1.865 million to 1.895 million.
Industrial Production for January declined from 0% to -0.1%. The previous month got revised down from 0.3% to 0%.
A mixed bag of data got published at 15:00 GMT with the December Business Inventories seen heading from -0.1% to 0.4%.
US Federal Reserve Board Member Christopher Waller will drop some comments around 18:15 GMT.
The US Treasury Department will head to markets to allocate a 4-week bill around 16:30 GMT and a 30-year TIPS auction around 18:00 GMT.
Equities are happy with the backtracking on the forward push of rate cuts and are in the green. European equities are up over 0.50%, while US equity futures are mildly in the green with Nasdaq dragging on the performance.
The CME Group’s FedWatch Tool is now looking at the March 20th meeting. Expectations for a pause are 89.5%, while 10.5% for a rate cut.
The benchmark 10-year US Treasury Note trades near 4.20%, roughly where it was trading ahead of the inflation report from Tuesday.

US Dollar Index Technical Analysis: As if nothing happened this week

The US Dollar Index (DXY) is now fully stalling ahead of even a doubtful attempt to reach 105. Traders will need to learn to live with these kinds of small and short-lived moments of volatility until finally one of the big four central banks (Fed, ECB, BoE, BoJ) makes a move with either cutting or hiking. Expect to see a fading DXY, which could fall back to 104 or lower in search of support

Should the US Dollar jump on the back of this Thursday’s data to 105.00, 105.12 as key levels to keep an eye on. One step beyond there comes in at 105.88, the high of November 2023. Ultimately, 107.20 – the high of 2023 – could even come back into scope, but that would be when several inflation measures are coming in higher than expected for several weeks in a row.

Support should now be provided by the high of last week Monday near 104.59. Further down that 100-day Simple Moving Average looks rather doubtful, near 104.24, so the 200-day SMA near 103.67 looks more solid. Should that give way, look for support from the 55-day SMA near 103.08.

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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