US Dollar Unchanged After Mixed Inflation Data

VaselineSeptember 11, 2024

0 3 minutes read

US Dollar Unchanged After Mixed Inflation Data

The US dollar index remains unchanged after the release of mixed inflation data.
US inflation fell to 2.5% on an annual basis in August.
The annual core CPI was flat at 3.2% in August.
Market reaction includes a higher likelihood of a 25 basis point cut by the Fed.

The US dollar index (DXY), a measure of the USD against six other currencies, lost ground after the release of mixed inflation data for August. Despite a decline in the global inflation rate to 2.5% on an annual basis, the core consumer price index (CPI) remained steady at 3.2%, indicating persistent inflationary pressures. The data dampened expectations for a 50 basis point interest rate cut by the Federal Reserve (Fed) in September, increasing the likelihood of a more modest 25 basis point cut.

Based on economic indicators, the US economy remains robust, beating expectations. As the market anticipates further monetary easing, it is essential to temper expectations. The current growth trajectory is unlikely to justify such aggressive easing measures. It is crucial to take a balanced approach, recognizing both the strength of the economy and the need for cautious optimism in decision-making.

Daily Market Motifs: DXY Rejects Weak Sentiment Data on Back of Asking Bets

Annual US CPI inflation fell to 2.5% in August from 2.9% in July, marking the lowest level since April 2018.
The annual core CPI, excluding volatile food and energy prices, was unchanged at 3.2% in August, as expected.
Monthly CPI rose 0.2%, while core CPI rose 0.3%, both above market expectations.
In reaction, the US dollar is considered flat as traders have discounted the odds of a 50 basis point rate cut by the Fed, now pricing in an 85% chance of a 25 basis point cut.

Daily Market Motifs: DXY Rejects Weak Sentiment Data on Back of Asking Bets

Technical analysis for the DXY index shows that indicators are currently in negative territory, but appear to have flattened. However, the index managed to regain its 20-day simple moving average (SMA) at around 101.60 on Tuesday, which improved the short-term outlook.

The Relative Strength Index (RSI) and the Moving Average Convergence Divergence (MACD) are both flat in negative territory, suggesting that there is no bearish threat. That said, the upside appeared to be limited on Wednesday, but buyers have more room to continue to advance.

Key support levels include 101.60, 101.30 and 101.00, while resistance levels include 101.80, 102.00 and 102.30.

Frequently asked questions about US dollars

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 banknotes. It is the world’s most heavily traded currency, accounting for more than 88% of total global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, as of 2022. After World War II world, the USD has taken 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 disappeared.

The most important factor influencing the value of the US dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to ensure price stability (inflation control) and to promote full employment. Its main tool for achieving these two objectives 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, which helps the value of the USD. When inflation falls below 2% or the unemployment rate is too high, the Fed can lower interest rates, which affects interest rates.

In extreme situations, the Federal Reserve can also print more dollars and engage in 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 (for fear of default). It is a last resort when simply lowering interest rates is unlikely to achieve the desired result. It was the Fed’s preferred weapon to combat the credit crunch that occurred during the Great Financial Crisis of 2008. This involves the Fed printing more dollars and using them to buy US government bonds, mainly 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 of maturing bonds it holds in new purchases. It is usually positive for the US dollar.

VaselineSeptember 11, 2024

0 3 minutes read

Daily Market Motifs: DXY Rejects Weak Sentiment Data on Back of Asking Bets

Daily Market Motifs: DXY Rejects Weak Sentiment Data on Back of Asking Bets

Frequently asked questions about US dollars

Vaseline

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