The US dollar falls as markets digest the inflation data, increasing favorable Fed bets

VaselineSeptember 13, 2024

0 3 minutes read

The US dollar falls as markets digest the inflation data, increasing favorable Fed bets

The US dollar depreciates as investors digest inflation data.
Fed interest rate cut expectations rise following dovish comments.
On the data front, consumer confidence is improving slightly in early September.

The U.S. dollar index (DXY), which measures the USD against a basket of currencies, posted losses on Friday as markets continue to analyze this week’s inflation data. At the end of the week, there was a slight increase in expectations that the Federal Reserve could cut interest rates by 50 bps in next week’s meeting.

The US economy remains robust, with growth beating expectations. However, financial markets may be overestimating the likelihood of aggressive monetary policy easing. This is evident in the high valuations of certain assets. Investors should be cautious and consider that the economic outlook may not justify current pricing practices.

Daily Market Reasons: US Dollar Index Falls as Fed Decision Approaches

“Fed Whisperer” Nick Timiraos suggested the decision could be a “reminder”, raising the odds of a 50 basis point cut from 10% to nearly 50%.
The market now prices close to 125 basis points of relaxation by the end of the year and 250 basis points over the next 12 months.
On Thursday, producer price index (PPI) data for August was in line with expectations, with headline inflation at 1.7% y/y and core inflation at 2.4% y/y.
On Friday, consumer confidence improved slightly in early September, with the University of Michigan’s consumer sentiment index rising to 69 from 67.9 in August.
The survey details showed that one-year inflation expectations fell to 2.7 percent from 2.8 percent, while five-year inflation expectations rose to 3.1 percent from 3 percent.

DXY Technical Outlook: Bear momentum resumes

Technical indicators for the DXY index have resumed their downward trajectory, falling into negative territory. Notably, the index broke above the 20-day simple moving average (SMA), indicating a shift in momentum to the downside.

The Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) also confirm the bearish trend. In light of these developments, further declines in the DXY index are anticipated in the near future.

Key support levels to watch include 101.60, 101.30 and 101.00, while potential resistance levels lie at 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 13, 2024

0 3 minutes read

Daily Market Reasons: US Dollar Index Falls as Fed Decision Approaches

DXY Technical Outlook: Bear momentum resumes

Frequently asked questions about US dollars

Vaseline

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