- US core and headline PPI came in higher than expected in February.
- On the negative side, Retail Sales from February and weekly Initial Jobless Claims came in lower than expected.
- US Treasury yields rose to two-week highs.
The US Dollar Index (DXY) is currently trading at 103.36, up 0.55%, on Thursday. The Greenback got a boost following the release of hot Producer Price Index (PPI) figures, which triggered a rally in US Treasury yields. On the negative side, Retail Sales and Jobless claims figures came in soft.
Despite inflation in the US remaining sticky, expectations on the start of the easing cycle of the Federal Reserve (Fed) remain steady. Markets are discounting that the rate cuts will begin in June, but the focus will now be on the revised Dot Plot for the upcoming March meeting to gather additional evidence on the Fed’s stances.
- The US Bureau of Labor Statistics reported that the Producer Price Index (PPI) for February increased by 1.6% YoY, which outperformed a consensus of 1.1% and is an improvement from the previous 1%.
- The core PPI showed an increase of 2.8% YoY, higher than the previous 2.6%.
- Retail Sales for February reported by the US Census Bureau, showed a monthly increase of 0.6% (MoM), below the 0.8% expected.
- The Initial Jobless Claims for the week that ended on March 9 was reported to be at 209K, lower than the predicted figure of 218K but higher than the previous 210K.
- Overall, the economic outlook in the US is mixed, with signs of sticky inflation and weak economic activity.
- Markets are currently predicting less than 15% and 60% for a Fed rate cut in May and June, respectively, which aligns closer to the Fed’s outlook for three cuts this year.
- US Treasury yields soared with the 2-year yield at 4.70%, the 5-year yield at 4.29%, and the 10-year yield at 4.28%.
On the daily chart, the Relative Strength Index (RSI) has a positive slope yet drifts in negative territory, signaling that bulls are slowly building momentum. Coupled with this, the decreasing red bars on the Moving Average Convergence Divergence (MACD) histogram corroborate the growing buying momentum as the sellers lose traction.
Furthermore, the positioning of DXY below its 20,100 and 200-day Simple Moving Averages (SMAs) underscores the embedded bearish outlook. However, if the buyers make a move above the 20-day average at around 103.50, the outlook might shift in favor of the bulls.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money.
When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions.
The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named 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 during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
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