US Dollar closes a neutral session while markets await CPI figures


  • The DXY Index is neutral at 104.12 and manages to clear daily losses.
  • All eyes are set on Wednesday's US CPI figures for March.
  • The outcome of the inflation figures will set the tone of the market’s bets on the Fed.


The US Dollar Index (DXY) is currently trading at 104.12, remaining rather neutral. Markets stand largely quiet as the week's highlight is the release of March’s US Consumer Price Index (CPI) figures on Wednesday. In the meantime, declining US Treasury yields seem to be weakening the US Dollar, and minor data releases have failed to trigger a significant reaction.

The data will continue fueling expectations for the Fed's easing cycle and as for now is seen starting in June. Amid two months of high inflation, the Fed revised its projections upward, but Jerome Powell confirmed a complacent attitude toward these figures. Consequently, the US Dollar remains in suspense, awaiting potential policy shifts tied to incoming data. Last week’s hot labor market figures may set the tone for a more hawkish Fed if inflation comes in higher than expected.

Daily digest market movers: DXY remains neutral ahead of CPI data, minor reports didn’t trigger movements

  • The National Federation of Independent Business (NFIB) reported a decline in small business optimism, largely because of inflation and labor market worries. Despite a strong jobs report in March, there's a suggestion that austerity in monetary policies could lead to a rise in unemployment rates if sustained.
  • Federal Reserve (Fed) officials seem to have tempered their hawkish tone, indicating a potentially dovish or neutral stance on monetary policy. The markets factor in diminished possibilities of a rate cut, with the chances of a June cut dropping to almost 50%, and a July cut below 90%. Both rates are seen as the lowest since last October.
  • US Treasury yields are undergoing a decline. Specifically, the 2-year yield declined to 4.74%, while yields at 5-year and 10-year tenures traded at 4.37% and 4.36%, respectively. 
  • CPI data will likely fuel volatility in the bond market and on the expectations of the next Fed decisions.
  • FOMC minutes from March's meeting on Wednesday will also be looked upon on Wednesday.

DXY technical analysis: DXY demonstrates bullish tendencies despite short-term constraints

On the daily chart, the static position of the Relative Strength Index (RSI) indicates neutral momentum, while the appearance of a fresh red bar in the Moving Average Convergence Divergence (MACD) histogram signals a potential shift toward bearish momentum in the short term.

On the other hand, the DXY is experiencing some bullish resilience, as evidenced by its stance above the 20, 100, and 200-day Simple Moving Averages (SMAs). The current positioning of DXY suggests that the buying force is still dominating with a defensive line held by the bulls, keeping the DXY  above these significant SMAs.

 

 

Fed FAQs

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.

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.

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.

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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