US Dollar tries to post fourth day of gains ahead of US CPI release
- The US Dollar trades in positive territory for a fourth consecutive trading day on Wednesday.
- Traders brace for US CPI data for October, with an uptick in inflation expected.
- The US Dollar index trades above 106.00, nearing a fresh six-month high.
The US Dollar (USD) tires to continue its uprising on Wednesday, signaling it still has fuel in its tank for a push higher supported by rising US yields. The Trump trade is getting more and more priced in, and, while the Fed remains data dependent, traders are gradually paring back bets of another interest-rate cut in December, a scenario that could give the Greenback another push higher.
The US economic calendar is having one of its focal points for this week with the release of the US Consumer Price Index reading for October. Expectations for the monthly headline figure are in a very tight range between 0.1% to 0.3%, making a consensus call of 0.2%. That means that any number outside that range will trigger a substantial move in markets.
Daily digest market movers: December rate cut hanging by a thread
- The Mortgage Bankers Association (MBA) kicks off this Wednesday’s calendar at 12:00 GMT with its weekly Mortgage Applications tracker. Last week, applications fell by a steep 10.8%.
- The US Consumer Price Index (CPI) release for October is due at 13:30 GMT:
- Monthly headline inflation is expected to remain stable at 0.2%, and the yearly reading is expected to tick up to 2.6% from 2.4%.
- Monthly core inflation is expected to remain unchanged at 0.3%, with the yearly figure also stable at 3.3%.
- Five Federal Reserve members are set to speak out this Thursday:
- Federal Reserve Bank of Minneapolis President Neel Kashkari is interviewed on Bloomberg TV at 13:30 GMT.
- Near 14:30, Federal Reserve Bank of New York President John Williams delivers welcome remarks at the Academy for Teachers Master Class in New York.
- Federal Reserve Bank of Dallas President Lorie Logan delivers opening remarks at the ninth joint energy conference hosted by the Federal Reserve Banks of Dallas and Kansas City near 14:45 GMT.
- Federal Reserve Bank of St.Louis President Alberto Musalem delivers a speech and participates in a Q&A session about the US economy and monetary policy at the Economic Club of Memphis at 18:00 GMT.
- Around 18:30 GMT, comments are expected from Federal Reserve Bank of Kansas City President Jeffrey Schmid, who delivers a keynote speech at the ninth joint energy conference hosted by the Federal Reserve Banks of Dallas and Kansas City.
- Equities are looking for direction after their lacklustre performance on Tuesday. Marginal gains and losses are seen in both the European and US equity markets.
- The CME FedWatch Tool is pricing in another 25 basis points (bps) rate cut by the Fed at the December 18 meeting by 62.4%. A 37.6% chance is for rates to remain unchanged. While the rate-cut scenario is the most probable, traders have pare back some of the rate-cut bets compared with a week ago.
- The US 10-year benchmark rate trades at 4.41%, after briefly ticking 4.45% this Wednesday in Asian trading.
US Dollar Index Technical Analysis: This is where it gets hot
The US Dollar Index (DXY) is adding more gains to its rally. That makes sense seeing where US yields are trading since this summer. The main issue could be that the trading is starting to overheat, increasing the chances of a correction soon under some profit taking.
All eyes are now on 106.52, the high of April and a double top, as it would mean a fresh 2024 high. Once the level would snap, 107.00 comes into play with 107.35 the next pivotal level to look out for.
On the downside, the round level of 104.00 and the 200-day Simple Moving Average (SMA) at 103.88 should refrain from sending the DXY any lower. Before that level, there is not much in the way with maybe some slim support at 104.63 (high of October 30).
US Dollar Index: Daily Chart
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.
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