US Dollar to close the week in the green thanks to CPI and PPI with dampening hopes for Fed rate cuts before June

The US Dollar jumps higher on hot PPI numbers.
Markets are giving up gains again and turn red in the PPI aftermath
The US Dollar Index jumps in the green for this week.

The US Dollar (USD) is set to close off the week in the green with market digesting both the Producer Price Index (PPI) performance and the University of Michigan print. The PPI print was a beat on estimates on all fronts and even beat the previous numbers. This means issues ahead for the Personal Consumption Expenditures (PCE) print in two weeks, which will rise as well. This means the US Federal Reserve will still holster its gun and will not cut anytime soon with risk of triggering an uprising in inflation when cutting too soon.

On the economic data front, all numbers are out of the way now. US Federal Reserve member Michael Barr dampens hopes which arose on the back of Austan Goolsbee's comments that the CPI report was just a hiccup. With more upside pressures in several other gauges on inflation, March and May look out of the question of a rate cut, with even June looking very doubtful.

Daily digest market movers: Heading up

US Federal Reserve Board member Michael Barr has commented on recent numbers and is dampening hopes a bit that rate cuts might still occure in March or May.
The main event this Friday is out and it is favoring a stronger US Dollar:
- The Producer Price Index report for January:
  - Monthly Headline PPI went from -0.1% to 0.3%.
  - Yearly Headline PPI is seen heading from 1.0% to 0.9%.
  - Monthly Core PPI shot higher from -0.1% to 0.5%.
  - Yearly Core PPI seen heading from 1.7% to 2%
- Building Permits shrunk from 1.493 million to 1.47 million.
- Housing Starts went from 1.562 million to 1.331 million.
Around 15:00 GMT, the University of Michigan has released its preliminary findings for February:
- The Consumer Sentiment Index went from 79 to 79.6.
- Inflation expectations remained steady at 2.9%.
Mary Daly from the San Francisco Fed is due to speak near 17:10 GMT.
Equities are struggling with Europe clinging on to its 0.50% green returns this Friday. US equities are ekeing out losses with the Nasdaq down near 1%, draggin all other indices with it.
The CME Group’s FedWatch Tool is now looking at the March 20th meeting. Expectations for a pause are 91.5%, while 8.5% for a rate cut.
The benchmark 10-year US Treasury Note trades near 4.30%, a touch higher towards the high of this week at 4.33%.

US Dollar Index Technical Analysis: Higher thanks to PPI and CPI

The US Dollar Index (DXY) briefly bounced off the 100-day Simple Moving Average (SMA) near 104.20 on Thursday. This comes as quite a surprise seeing its poor performance over the past few days and weeks. The hot PPI print looks to be pushing the DXY in the green for this week.

Should the US Dollar jump Friday’s data to 105.00, 105.12 as key levels to keep an eye on. One step beyond there comes in at 105.88, the high of November 2023. Ultimately, 107.20 – the high of 2023 – could even come back into scope, but that would be when several inflation measures are coming in higher than expected for several weeks in a row.

As mentioned at the second paragraph above, that 100-day Simple Moving Average looks rather doubtful, near 104.24, so the 200-day SMA near 103.67 looks more solid. Should that give way, look for support from the 55-day SMA near 103.08.

Fed FAQs

What does the Federal Reserve do, how does it impact the US Dollar?

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.

How often does the Fed hold monetary policy meetings?

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.

What is Quantitative Easing (QE) and how does it impact USD?

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.

What is Quantitative Tightening (QT) and how does it impact 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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