US Dollar declines as PCE falls, markets confident of larger November cut
- US inflation signals are cooling with PCE reading below expectations.
- Consumer sentiment has rebounded, indicating brighter economic expectations.
- USD might see additional downside if the markets remain stubborn on November’s 50 bps cut bet.
The US Dollar Index (DXY), which measures the value of the USD against a basket of major currencies, stands soft after the release of the US Personal Consumption Expenditures (PCE) data from August. The headline PCE inflation, the Federal Reserve's (Fed) preferred inflation measure, came in softer than expected, while the core PCE inflation matched expectations.
Investors will be attentive to incoming data to continue placing their bets on the next Fed decision. Now focus shifts to September’s labor market data.
Daily digest market movers: US Dollar declines on soft PCE data
- Market is starting to pare back its Fed easing bets, with the market now pricing in 175 bps of total easing over the next 12 months vs. 200 bps at the start of this week.
- Headline PCE Price Index rose by 2.2% YoY in August, below market expectations of 2.3%.
- Core PCE Price Index, excluding food and energy, increased by 2.7%, matching consensus estimates.
- Consumer confidence in the US improved in September with the University of Michigan's Consumer Sentiment Index edging higher to 70.1 from 66 in August.
- The five-year inflation expectation held steady at 3.1%, indicating that consumers do not expect inflation to rise significantly in the coming years.
- While dovish bets eased somewhat, the markets are pricing in a 50 bps cut for the next November meeting, which seems to weaken the USD.
DXY technical outlook: DXY signals bearish momentum, resistance at 101.00
Technical analysis indicates that the DXY index remains vulnerable to further declines as the Relative Strength Index (RSI) and the Moving Average Convergence Divergence (MACD) continue their downward trend and struggle to gather momentum. The 101.00 level continues to act as a strong resistance, capping the upside potential for the US Dollar.
Supports are located at 100.50, 100.30 and 100.00, while resistances are at 101.00, 101.30 and 101.60. The index's inability to overcome the 101.00 level suggests that the downside momentum could persist in the near term.
US Dollar FAQs
The US 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 found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, 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 went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
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 stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering 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 in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
Related Articles
[IN-DEPTH ANALYSIS] Constellation Energy (CEG): Deepseek Impact Meets Nuclear Power: Why CEG Is Still Underrated in the AI Era?
TradingKey - Surging electricity demand driven by AI data centers, electrification, and industrial growth exacerbates US power market tightness. DeepSeek’s efficiency gain may reduce per-unit power consumption, yet Jevons Paradox sustain long-term power demand resilience.
Market Week Ahead: Supercentral Bank Week and NVIDIA's GTC Highlights
TradingKey - Last week, the U.S. stock market extended its downward trend. The Dow Jones fell about 3.1%, marking its worst weekly performance since March 2023.
[IN-DEPTH ANALYSIS] Trump Policies: Market Overreacted, Remain Bullish on Stocks
We believe the market is currently overemphasizing the impact of tariffs while overlooking other economic and political factors. In summary, we remain bullish on both U.S. and European stocks..jpg)
What Should Investors Watch With the Upcoming Federal Reserve FOMC From 18-19 March 2025?
TradingKey - It has been a rough three weeks for investors in US stock markets. The S&P 500 Index took just 16 trading sessions to fall 10%, what is officially termed a “correction”.
AI Applications Take Center Stage at GTC 2025: A New Dawn for NVIDIA Investors?
TradingKey - NVIDIA, the technology giant, has had a rocky start this year, grappling with concerns over the rise of DeepSeek and escalating tensions in U.S.-China trade relations. Year to date, NVDA's stock has declined by 10.5%.