US Dollar edges mildly lower on soft CPI revisions, closes a winning week
- The DXY stands at 104.15 on Friday with mild losses.
- US December’s inflation figures were downwardly revised by the BLS.
- Next week January’s CPI is due.
The US Dollar (USD) stood flat on Friday, with mild losses, closing a winning week but trimming most of its gains. All eyes are on next week’s US inflation data.
The US Dollar gathered significant ground in the first days of February after Jerome Powell, the Chair of the US Federal Reserve (Fed), mentioned that a reduction in interest rates in March seemed improbable. He emphasized the necessity for further proof of declining inflation before the Fed could feel confident about lowering rates, so incoming data will be key. Next week, the US will release Consumer Price Index (CPI) figures from January, which will likely set the pace of the Greenback for the short term.
Daily digest market movers: US Dollar loses some ground on soft CPI revisions
- The US Bureau of Labor Statistics (BLS) updated the Consumer Price Index (CPI) figures with new seasonal adjustments, lowering December's inflation rate to 0.2% from the initial 0.3%.
- The Core CPI for December remained steady at 0.3%, with no revisions made.
- November's CPI was adjusted upwards to a 0.2% increase from the previously reported 0.1%, while October's 0.1% rise was unchanged.
- According to the CME FedWatch Tool, the odds of a cut in March are low at around 20% but may see some changes in case the US CPI from January comes in lower than expected.
Technical analysis: DXY bulls struggle, continue battling with 100-day SMA
On the daily chart, the Relative Strength Index (RSI) is flat, situated in positive territory, which generally suggests a stall in buying momentum but still maintains a generally bullish tilt. Coupled with the Moving Average Convergence Divergence (MACD), which shows flat green bars, it confirms the trend of bullish momentum yet hints at a possible consolidation or minor pullback.
On a wider horizon, Simple Moving Averages (SMAs) provide a mixed picture. The index is trading above the 20-day SMA, a clear signal of short-term bullish strength. However, it remains below the 100-day SMA, indicating that the medium-term selling pressure persists. Interestingly, it holds above the 200-day SMA, underscoring a strong bullish presence in the long run.
This confluence of factors paints a picture of bulls struggling to gain substantial ground, which leaves the index vulnerable for further downside if the bulls don't wake up.
US Dollar FAQs
What is the US Dollar?
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.
How do the decisions of the Federal Reserve impact the US Dollar?
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.
What is Quantitative Easing and how does it influence the US 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 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.
What is Quantitative Tightening and how does it influence the 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.