US Dollar defends its ground ahead of CPI

DXY holds gains around 106.00 after Fed's Bullard comments.
US CPI data showed inflation in October rising by 2.6%, in line with estimates.
Core CPI rises by 3.3%, exceeding expectations and driving US yields higher.

The US Dollar Index (DXY), which measures the value of the USD against a basket of six currencies, has surged higher on Wednesday in response to hawkish comments from Federal Reserve (Fed) officials. Dallas Fed President Robert Kaplan expressed caution regarding the possibility of a December rate cut, dampening expectations that had been building in the market. The DXY has climbed above 106.00, reaching a fresh six-month high as a result of these comments but mildly retreated after Consumer Price Index (CPI) data from October, which didn’t show major surprises.

Daily digest market movers: US Dollar holds gains after US CPI

The DXY is experiencing a mild corrective decline after the release of US CPI data for October.
The DXY is hovering around 105.80, supported by a marginal retracement in US yields across the curve.
The Bureau of Labor Statistics reported that the headline CPI rose by 2.6% YoY last month, matching prior forecasts.
Core CPI, which excludes food and energy, increased by 3.3% over the last 12 months.
The Fed members are cooling down the market’s expectations of the central bank’s aggressive easing cycle, but investors are quite confident of another 25 bps cut in December.

DXY technical outlook: Bullish momentum continues for Greenback

Despite a slight pullback on Wednesday, technical indicators for the DXY Index remain bullish, suggesting a potential continuation of the uptrend. The RSI and MACD indicate continued positive momentum. While consolidation or a pullback is possible before a further advance, the overall technical outlook remains positive with resistance levels at 106.50, 107.00 and 107.30 and support levels at 105.50, 105.30 and 105.30.

That being said, the DXY's surge above 106.00, approaching its highest level since July, is supported by positive indicators. However, the indicators are approaching overbought territory, indicating a potential reversal or consolidation. Traders should monitor the index's behavior around these levels to assess the sustainability of the uptrend. A rejection at the overbought area could signal a pullback or a change in market sentiment, while a sustained break above these levels could extend the bullish momentum.

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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