close
close
migores1

US dollar weakens on Wednesday after cooling CPI

  • USD marks a slight decline as lower US inflation further dulls its appeal.
  • Softer but in-line CPI numbers give markets reason to feed on a convenient narrative.
  • Markets are still anticipating the first rate cut in September.

The US dollar (USD), as measured by the US Dollar Index (DXY), showed a slight downtrend below the 103.00 level during the trading session on Wednesday. This decline follows confirmation of lower-than-expected inflation in the US, which somewhat overshadowed the stable outlook for the country’s labor market.

Although market expectations about future monetary policy decisions have not changed substantially, the US economic trend projection still points to an above-trend growth rate. This pattern suggests that the market may be overpricing the need for aggressive monetary easing going forward.

Daily Market Reasons: Lower US inflation dampens US dollar appeal

  • Declining US inflation, as measured by the Consumer Price Index (CPI), was a key driver of today’s market dynamics.
  • Headline CPI fell to 2.9% on an annual basis in July, from June’s 3% level, slightly below market expectations.
  • Core CPI (which excludes fluctuations in food and energy prices) stood at 3.2% YoY, up from 3.3% seen in July, in line with market expectations.
  • The possibility of a cut by the Federal Reserve (Fed) in September is about 80%.
  • These future probabilities of easing will largely depend on other economic indicators.

DXY Technical Outlook: Steady bearish outlook, indicators deep in negative territory

DXY’s technical indicators point to a persistent bear market situation, with buyers failing to generate significant upside. The index continues to anchor below the 20,100 and 200-day simple moving averages (SMA), reinforcing the dominant bearish sentiment.

The Relative Strength Index (RSI) remains near 30, indicating continued selling pressure. On the other hand, the Moving Average Convergence Divergence (MACD) is stabilizing while remaining in negative territory with low red bars.

Support levels: 102.40, 102.20, 102.00

Resistance levels: 103.00, 103.50, 104.00

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.

Related Articles

Back to top button