- The US Dollar erases losses on the back of steady inflation figures.
- All CPI numbers are in line expectations, no outliers.
- The US Dollar index trades in the mid-102.00 range and could trade in another ballpark by the closing bell.
The US Dollar (USD) is trying to erase its earlier losses after the US Consumer Price Index (CPI) for July comes in at the expectations. No surprises there, which must be a bit disappointing for the traders have sold US Dollar past 24 hours after the US Producer Price Index (PPI) came in substantially softer on Tuesday. The reaction for now looks to be contained, though might see more follow through towards the US session.
On the economic data front, all data points for this Wednesday are out of the way. The upcoming number on Thursday with US Retial Sailes will now gain in importance as the CPI print was no real market moving event after all. Add in there the weekly jobless claims and suddenly Thursday could become very interesting.
Daily digest market movers: CPI holds no surprise
- The US Dollar is falling against the Euro, pushing the pair to 1.1029 in EUR/USD for the first time since January 2024 ahead the US CPI release.
- Japan must seek a new prime minister as Fumio Kishida does not want to run for a second term.
- The Reserve Bank of New Zealand (RBNZ) surprised the market with a 25 basis point interest rate cut during the Asian session on Wednesday and the message that the cutting cycle has started. RBNZ Chairman Adrian Orr even said that a 50 basis point cut was on the table for this meeting. A comment that sent the New Zealand Dollar 1% lower against the US Dollar.
- At 11:00 GMT, the Mortgage Bankers Association (MBA) has released its weekly Mortgage Applications Index for the week ending August 9. The previous week, it was up 6.9% with an even more firm 16.8% for this week.
- At 12:30 GMt, the US consumer inflation data for July came out:
- Headline monthly CPI inflation came in unchanged at 0.2%. The yearly benchmark went from 3.0% to 2.9%
- Core monthly CPI inflation increased by 0.2% after the 0.1% in June. The yearly gauge softened to 3.2% from 3.3%.
- Equity markets are having difficulties reading the CPI print as either bearish or bullish and are trading sideways for now.
- The CME Fedwatch Tool shows a 47.5% chance of a 25 basis points (bps) interest rate cut by the Fed in September against a 52.5% chance for a 50 bps cut. Another 25 bps cut (if September is a 25 bps cut) is expected in November by 31.5%, while there is a 50.8% chance that rates will be 75 bps below the current levels and a 17.7% probability of rates being 100 basis points lower.
- The US 10-year benchmark rate trades at 3.86% and erases some earlier losses.
US Dollar Index Technical Analysis: Are these inflation numbers enough?
The US Dollar Index (DXY) has moved away from the crucial 103.18 pivotal level following the surprise PPI release on Tuesday. From a technical perspective, a slide below 103.00 suggests more downside should be at hand. The DXY will need to decline further, pulling the Relative Strength Index (RSI) into oversold to see ample support and sending it back up towards 103.00.
A two-tiered recovery can be taken away from the charts, with the first resistance(yes, again, the same level we have been talking about since last week) at 103.18, where the DXY has been unable to hold above in recent days. Once bulls can hold that level and move away from it, 104.00 comes into play. However, further upside is limited as the 200-day Simple Moving Average (SMA) at 104.12 will throw a spanner in the works in the near term.
On the downside, the oversold condition in the Relative Strength Index (RSI) indicator has eased in the daily chart and holds room for a small leg lower. Support nearby is the August 5 low at 102.17. Once through there, pressure will start to build on 102.00 as a big psychological figure before testing 101.90, which was a pivotal level in December 2023 and January 2024.
US Dollar Index: Daily Chart
(This story was corrected on August 14 at 10:40 GMT to say Reserve Bank of New Zealand, not Royal Bank of New Zealand ).
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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