US dollar falls as PCE falls, markets confident of bigger cut in November

VaselineSeptember 27, 2024

0 3 minutes read

US dollar falls as PCE falls, markets confident of bigger cut in November

US inflation signals are cooling, with a below-expected PCE reading.
Consumer sentiment has rebounded, indicating better economic expectations.
The USD could face further downside if markets remain stubbornly on the 50bps cut November bet.

The US Dollar Index (DXY), which measures the value of the USD against a basket of major currencies, remains weak following the release of August US personal consumption expenditure (PCE) data. Headline PCE inflation, the Federal Reserve’s (Fed) preferred measure of inflation, came in weaker than expected, while core PCE inflation was in line with expectations.

Investors will be paying close attention to incoming data to continue betting on the Fed’s next decision. The focus now shifts to September labor market data.

Daily Market Reasons: US Dollar Falls on Weak PCE Data

The market is starting to reduce its bets on Fed easing, with the market now pricing in 175 bps of total easing over the next 12 months from 200 bps earlier this week.
The PCE price index rose 2.2% from a year ago in August, below market expectations of 2.3%.
The core PCE price index, excluding food and energy, rose 2.7 percent, according to consensus estimates.
US consumer confidence improved in September, with the University of Michigan’s consumer sentiment index rising to 70.1 from 66 in August.
Five-year inflation expectations held steady at 3.1%, indicating that consumers do not expect inflation to rise significantly in the coming years.
While dovish bets have eased somewhat, markets are pricing in a 50bps discount for the next meeting in November, which looks set to weaken the USD.

DXY Technical Outlook: DXY signals bearish momentum, resistance at 101.00

Technical analysis indicates that the DXY remains vulnerable to further declines as the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) continue their downtrend and struggle to gain momentum. The 101.00 level continues to act as strong resistance, limiting upside potential for the US dollar.

Supports are located at 100.50, 100.30 and 100.00, while resistances are at 101.00, 101.30 and 101.60. The inability of the index to break above the 101.00 level suggests that the downward momentum may persist in the short term.

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 27, 2024

0 3 minutes read

Daily Market Reasons: US Dollar Falls on Weak PCE Data

DXY Technical Outlook: DXY signals bearish momentum, resistance at 101.00

Frequently asked questions about US dollars

Vaseline

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