- DXY Index is trading near 104.00, up for Thursday’s session.
- Core PCE Price Index matched predictions.
- Markets continue delaying rate cuts from the Fed, which favors the Greenback.
The US Dollar Index (DXY) is trading near 104 and keeps gaining traction due to markets delaying rate cuts from the Federal Reserve (Fed). Datawise, Personal Consumption Expenditures (PCE) showed no surprises.
As long as the US does not show conclusive evidence of inflation coming down, the Fed won’t rush to cut rates. In addition, the markets are aligned with the bank’s forecasts and are now expecting 75 bps of easing in 2024, starting in June.
- The US Bureau of Economic Analysis announced on Thursday that the inflation rate in the US, gauged by the yearly change in the Personal Consumption Expenditures (PCE) Price Index, fell to 2.4% in January from 2.6% in December.
- The Core PCE Price Index climbed by 2.8% over the year, also meeting expectations.
- As the US economy doesn’t show conclusive evidence of inflation coming down, the markets are pushing the start of easing to June, while the odds of a cut in March and May remain low.
The indicators on the daily chart reflect a positive shift in buying momentum. Initially, the Relative Strength Index (RSI) exhibits a positive slope, and being in positive territory indicates a strengthening bullish trend. However, the Moving Average Convergence Divergence (MACD) shows flat red bars, hinting toward potential bearish pressure, where selling activity might prevail, though not necessarily resulting in a trend shift.
In the broader technical landscape, despite the underlying bearish pressure that has pushed the pair below the 20-day Simple Moving Average (SMA), the positioning above the 100 and 200-day SMAs suggests that buyers still have the upper hand in this play.
US Dollar FAQs
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.
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.
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.
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.
