- DXY is at 104.10 on Monday with modest gains.
- The Fed's dovish stance remains in place despite the minimal chance of a March rate cut.
- Tuesday's January CPI figures determine Fed tapering timing and USD momentum.
The American dollar (USD) remains firm at 104.10, demonstrating stability ahead of the release of key US data expected this week. Financial markets are eagerly awaiting economic reports on the consumer price index (CPI), producer price index (PPI) and retail sales data from January, which could potentially further strengthen the dollar's position. At the same time, expectations are based on upcoming inflation reports, which are expected to shed light on the economy's performance and the Federal Reserve's (Fed's) future stance.
In early February, the US dollar made notable gains following comments from the company Jerome Powell, chairman of the Federal Reserve System, indicating that a March rate cut is unlikely. He stressed that more evidence of falling inflation is needed before the Fed can consider cutting rates, so upcoming data will be key. Tuesday edition of the American consumer Price index (CPI) for January should significantly affect the short-term direction of the US dollar.
Daily market roundup: US dollar holds steady as markets await key economic data, yields remain flat
- Core CPI is expected to have risen 3.7% year-on-year in January, while the leading indicator is expected to slow to 2.9% year-on-year.
- US Treasury yields fell slightly. The 2-year yield is 4.47%, the 5-year yield is 4.12% and the 10-year yield is 4.17%.
- CME's FedWatch tool suggests a 20% chance of a rate cut for the March meeting, but there could be some change if US CPI from January comes in lower than expected. These chances are around 50% for May.
Technical analysis: DXY bulls hold, unable to break 100-day SMA
The Relative Strength Index (RSI) remains stable in positive territory, indicating that the bullish force retains some strength in the dynamics of the index despite recent shifts. The Moving Average of Convergence Divergence (MACD) also offers green flat bars, indicating a positive trend in line with a bullish stance.
Within the simple moving averages (SMA), DXY appears to be moving above the 20-day SMA and similarly above the 200-day SMA, indicating a strong bullish outlook in the longer term. However, it is trading just below the 100-day SMA, indicating some selling pressure in the near to medium term.
Given these indicators, it is evident that buying momentum is more present than selling pressure. While the bearish moves have caused some disruption, the resilient undercurrent of bullish energy reflected in the RSI, MACD and SMA suggests a bullish outlook in the overall trend.
Frequently asked questions about 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 large number of other countries where it circulates alongside local banknotes. It is the most traded currency in the world, accounting for more than 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022.
After World War II, the USD took over from the British pound as the world's reserve currency. For most of its history, the US dollar was backed by gold, until the Bretton Woods Agreement in 1971, when the gold standard was abolished.
The most important factor affecting the value of the US dollar is monetary policy, which is shaped by the Federal Reserve System (Fed). The Fed has two mandates: to achieve price stability (control inflation) and to promote full employment. Its primary tool to achieve these two goals is the adjustment of interest rates.
When prices rise too fast and inflation is above the Fed's 2% target, the Fed will raise rates, helping the value of the USD. When inflation falls below 2% or the unemployment rate is too high, the Fed can cut interest rates, weighing on 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 in a troubled financial system.
This is a non-standard policy measure used when credit has dried up because banks will not lend to each other (for fear of counterparty default). It is a last resort when simply cutting interest rates is unlikely to achieve the desired result. It was the Fed's weapon in fighting 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, mostly from financial institutions. QE usually leads to a weaker US dollar.
Quantitative tightening (QT) is the opposite process in which the Federal Reserve stops buying bonds from financial institutions and does not invest the principal of the bonds it holds in new purchases. It is usually positive for the US dollar.