- The Dollar remains stable after the decline registered in the first hours of the European session.
- Investors are not surprised by the CPI data and decide to save ammunition for the Fed meeting on Wednesday.
- The DXY Dollar Index is trading at the 104.00 level and could still turn positive on Tuesday.
The US Dollar (USD) sees year-on-year core inflation firming at 4%. It is still double and is far from the objective of being close to or below 2%. Therefore, the US Federal Reserve and Fed Chair Jerome Powell will have their work cut out for them to contradict market expectations that cuts could come soon, and rather they will have to make it clear to markets that You must first meet the inflation target before starting to dream of any cuts.
On the economic front, the main news is the annual underlying inflation of the Consumer Price Index (CPI). The annual underlying CPI remains at 4% and unchanged from the previous month. Both general and core inflation rose 0.1% compared to the previous month. Thus, US inflation is not registering the same movement as Europe, where inflation is collapsing and unraveling rapidly.
Daily Market Summary: CPI Becomes a Non-Event
- The publication of the US Consumer Price Index for November did not bring any surprises:
- General monthly inflation went, as expected, from 0% to 0.1%.
- Monthly core inflation went from 0.2% to 0.3%.
- Annual general inflation fell from 3.2% to 3.1%.
- Interannual core inflation remains stagnant at 4%.
- Around 18:00 GMT, the US Treasury will auction 30-year bonds.
- Stock markets are slowly but surely heading into positive territory with the CPI numbers out of the way.
- 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 10-year US Treasury bond is trading around 4.19%.
DXY Dollar Index Technical Analysis: Pressure Mounts
The Dollar is preparing for the first of two days of volatility ahead, with the publication of the Consumer Price Index this Tuesday and the Federal Reserve meeting on Wednesday. Traders will want to listen to the Fed to see if markets are correct in forecasting early rate cuts for 2024, or if they rather need those cuts to come later. In the latter case, the DXY Dollar Index could exceed 104.00 points.
The DXY index is retreating a bit, below 104.00. The DXY index first needs to confirm its bullish move by breaking above Friday’s high at 104.26. From there, the 100-day SMA near 104.55 looks very attractive ahead of Wednesday’s Fed meeting.
On the downside, the 200-day SMA at 103.55 has done a tremendous job of supporting the DXY index, with buyers entering below 103.56 and pushing it back towards that same level near the US closing bell. level fails this week, the next level to watch will be the November lows, near 102.46. Further downward pressure could put the 100.00 level in sight, especially if US yields sink below 4%.
US Dollar FAQ
What is the US Dollar?
The United States Dollar (USD) is the official currency of the United States of America, and the “de facto” currency of a significant number of other countries where it is in circulation alongside local banknotes. According to 2022 data, it is the most traded currency in the world, with more than 88% of all global currency exchange operations, equivalent to an average of $6.6 trillion in daily transactions.
After World War II, the USD took over from the pound sterling as the world’s reserve currency.
How do the decisions of the Federal Reserve affect the Dollar?
The single most important factor influencing the value of the US Dollar is monetary policy, which is determined by the Federal Reserve (Fed). The Fed has two mandates: achieve price stability (control inflation) and promote full employment. Your main tool to achieve these two objectives is to adjust interest rates.
When prices rise too quickly and inflation exceeds the 2% target set by the Fed, the Fed raises rates, which favors the price of the dollar. When Inflation falls below 2% or the unemployment rate is too high, the Fed can lower interest rates, which weighs on the Dollar.
What is Quantitative Easing and how does it influence the Dollar?
In extreme situations, the Federal Reserve can also print more dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit into a clogged financial system. This is an unconventional policy measure used when credit has dried up because banks do not lend to each other (for fear of counterparty default). It is a last resort when a simple lowering of interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis of 2008. It involves the Fed printing more dollars and using them to buy US government bonds, primarily from financial institutions. QE usually leads to a weakening of the US Dollar.
What is quantitative tightening and how does it influence the US dollar?
Quantitative tightening (QT) is the reverse process by which the Federal Reserve stops purchasing bonds from financial institutions and does not reinvest the principal of maturing portfolio securities in new purchases. It is usually positive for the US dollar.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
