US Dollar and US yields jump higher after halt in disinflationary trajectory for the US

The US Dollar jumps in the green after a hot US CPI print.
Traders that betted on quick rate cuts are left behind under the current tight inflation conditions.
The US Dollar Index jumps further away from 102 and heads towards 103.

The US Dollar (USD) survives yet another day after pressure was building throughout the week for it do snap the 102 level to the downside in the US Dollar Index (DXY). Bets were placed in favor of further and quicker disinflation numbers, putting pressure on the Greenback to weaken. This inflation print confirms the US Federal Reserve's stance, warnings and rightfull assessment to keep rates steady for now and await further data before issuing rate cuts.

Additionally, traders had the Jobless Claims numbers as well to assess. While disinflation nearly came to a stand still, the labor market seems to be remaning very tight. While expectetions were for Initial Jobless Claims to jump, they remained unchanged.

Even when taking the previous revised number into account for the Initial Jobless Claims, there is even a decline. Markets are paring back bets that rate cuts thus would come sooner, while commodities are jumping higher. The energy component was expected to be a disinflationary element, though in this inflation report proved to be a contribution to the uptick in headline inflation.

Daily digest market movers: Energy component biggest surprise for headline inflation

As expected, some fireworks with the data releases from 13:30 GMT:
- US Consumer Price Index:
  - Monthly Headline CPI was expected to head from 0.1% to 0.2%. Instead it went from 0.1% to 0.3%.
  - Yearly Headline CPI was foreseen to head from 3.1% to 3.2%. The Index rose to 3.4%.
  - Monthly Core CPI remained steady at 0.3%.
  - Yearly Core CPI was foreseen to head from 4% to 3.8%. Actual number came out at 3.9%
  - The Greenback rallied on this print with disinflation bets being unwinded and early rate cut probabilities from the Fed for March being pared back.
- Jobless Claims release:
  - Initial Jobless Claims was expected to pick up from 202,000 to 210,000, though remained unchanged at 202,000, with the previous week even revised up to 203,000.
  - Continuing Claims were seen heading from 1,855 million to 1,871 million. Instead, it shrunk to 1,834 million.
US equity markets are not digesting the US CPI report very well. The expected Goldilocks scenario is not unfolding (just yet). All major US indices are down over 0.50% and European equities have reversed course as well and are selling off now into their closing bell.
The CME Group’s FedWatch Tool shows that markets are pricing in a 97.4% chance that the Federal Reserve will keep interest rates unchanged at its January 31 meeting. Around 2.6% expect the first cut already to take place.
The benchmark 10-year US Treasury Note jumps back above 4% to 4.04% with traders selling bonds in the assumption rates will remain steady for at least another three months.

US Dollar Index Technical Analysis: The Fed was right, so next time listen!

The US Dollar proved to be a textbook example of 'buy the rumour, sell the fact'. Expectations were too high and too elevated that the US disinflation would pick up speed and sink further. With big bets placed on quick cuts in early 2024, those bets need to be unwinded, resulting in favor of the Greenback and US rates overall, while equities fall in disfavor for now.

The first level on the upside to watch is 103.00, which falls nearly in line with the trend line from the top of October 3 and December 8. If broken and closed above, the 200-day Simple Moving Average (SMA) at 103.43 comes into play. The 104.00 level might be too far off, with 103.78 (55-day SMA) coming in as the next resistance.

To the downside, a rejection by the descending trendline will give fuel to Greenback bears leading to a further downturn. The line in the sand here is 101.74, the floor which held halfway through December before breaking down in the last two weeks. In case the DXY snaps this level, expect to see a test at the low near 100.80.

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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