US Dollar rallies as goldilocks scenario evaporates after sticky PPI numbers

The US Dollar books solid gains for this week.
US PPI numbers point to sticky inflation and contradict Thursday's CPI sentiment.
The US Dollar Index is about to close out the week with a stronger performance.

The US Dollar (USD) gets the wind in its sails as the US Producer Price Index (PPI) numbers point a rather stickier picture as lower downward revisions from June numbers against higher final readings for July are showing a pickup. initial reaction is a stronger US Dollar while equities are dropping lower in the immediate aftermath of the recent numbers coming out.

The US Producer Price Index (PPI) numbers from 12:30 GMT thus made the US Dollar a nudge stronger in most major pairs. The Michigan Consumer Sentiment Index and inflation expectations from 14:00 GMT are pointing to the expectation that inflation should not go up anymore. It does not confirm though that inflation should abate further quickly or at a solid pace, which means that markets are heading for a bumpy road in the fall where markets will be moving from one data point to the next.

Daily digest: US Dollar a force to reckon with

On the geopolitical front, there is some renewed tit-for-tat between the US and China. Torn in the eye for China was the trade deal the US and Taiwan signed, while the US issued a tech-ban on US investments towards China. Meanwhile, US president Joe Biden called China a “ticking time bomb” amidst warnings from China calling out the US to uphold current outstanding agreements and trade conditions.
China meanwhile came out with a comment that it is increasing its protection of foreign firms projects.
At 12:30 GMT the US Producer Price Index (PPI) data for July came out: On the monthly performance, the overall price index rose from a revised 0.0% to 0.3%. The core price index for the month went from a revised -0.1% for June to 0.3% for July. On the yearly performance, the overall index remained steady at 2.4%, and the core equally at 2.7%.
The14:00 GMT preliminary Michigan Consumer Sentiment Index for August went a touch lower from 71.6 to 71.2. The inflation expectations on the 5-10 year projection are down from 3% to 2.9%. This numbers supports the outlook thus that inflation should not pick up again, but will not be unwinding quickly as well in the nearby future. Sticky inflation thus is the end result of all the data points that hit the markets this week, which means the US Federal Reserve (Fed) is correct with its assessment not to cut rates for the coming months.
The Japanese Topix index looks to be the only one which has closed this Friday in the green, being up nearly 1%, while the Chinese Hang Seng is down 1%. European equities are all down over 1% and US indices are firmly in the red as well after the goldilocks scenario gets shelved and replaced with the sticky-inflation-data-dependancy scenario.
The CME Group FedWatch Tool shows that markets are pricing in a 90.5% chance that the Federal Reserve will pause interest rate hikes at its meeting in September. The probability jumped from 85% on Thursday after the latest US CPI print showed inflation grew at a steady pace.
The benchmark 10-year US Treasury bond yield trades at 4.12%, consolidating the area above 4%. Bonds are a bit less in favor, and thus require a higher yield for investors to buy as markets are baking in the end of the hiking cycle for the Fed.

US Dollar Index technical analysis: new monthly high

The US Dollar had a very volatile day on Wednesday, though saw the US Dollar bulls prevail at the US closing bell. The US Dollar rally for this summer is not over just yet and could still make a new high for August, as the Producer Price Index numbers this Friday point to rather sticky inflation forces. Watch out for 102.80 as a line in the sand on the topside on the US Dollar Index (DXY) for more US Dollar strength next week.

For the upside, 102.80 – Tuesday’s peak – is the level to test and break in order to see some more stronger US Dollar moves. This level needs to be broken should the DXY want to try to head to 103.00. Although a bit far off still, the 200-day Simple Moving Average (SMA) at 103.41 could become the new target for next week if the DXY can continue trending higher.

On the downside, a floor is building with the 55-day and the 100-day SMA at 102.40 and 102.30, respectively. However, these levels have been chopped out quite heavily already throughout the week and could become less relevant. Should the Greenback weaken on the back of the PPI or Michigan data, the 102.00 level could come back under more downside pressure.

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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