US Dollar enjoys second profitable day with CPI being a non event

The US Dollar holds on to Monday’s gain in a first step to recover last week’s losses.
CPI release disappointed markets with no accelerated disinflation.
The US Dollar Index trades back above 103.00 in its road to recovery.

The US Dollar (USD) is trading broadly in the green on Tuesday, after the release of the monthly US Consumer Price Index (CPI) numbers for Tuesday. More details can be found below though it appears that all numbers came in line of expectations. And markets are clearly not happy with that, with markets rather looking for a more speedy disinflationary path. This means in the rate cut reshuffle that May is out of the cards and focus is now rather on June and July.

The US Consumer Price Index (CPI) thus was broadly in line, besides the yearly components. Both the Yearly Core and the Yearly Headline CPI ticked up 0.1%, rather hitting the upper level of estimations foreseen in each segment. This sparked a bit of US Dollar weakness with markets paring back bets of a very quick rate cut in already May or June.

Daily digest market movers: CPI on track

The NFIB Business Optimism Index for February has already been released around 10:00 GMT. Previous number was at 89.9 with the February number coming in at 89.4.
The Consumer Price Index for February is to be released at 12:30 GMT:
- Monthly Headline CPI came in as expected at 0.4%, from 0.3% a month earlier.
- Yearly Headline CPI jumped from 3.1% to 3.2%.
- Monthly Core CPI remained stable at 0.4%.
- Yearly Core CPI declined from 3.9% to 3.8%.
At 17:00 GMT, the US Treasury Department will head to markets to allocate a 10-year Note.
Equities are rallying with the Nasdaq up over 1%, pulling all other US indices in the green.
According to the CME Group’s FedWatch Tool, expectations for a Fed pause in the March 20 meeting are at 97%, while chances of a rate cut stand at 3%.
The benchmark 10-year US Treasury Note trades around 4.15%, and trades off this week's low.

US Dollar Index Technical Analysis: Nothing to see here

The US Dollar Index (DXY) has tried to recover a touch on Monday, with still a very long road ahead to come back to levels where it was two weeks ago. The US CPI print is expected to move the needle a bit in terms of timing on the much-anticipated first rate cut from the Fed. However, simply moving the timing by a month means no big intraday moves are to be expected as traders will likely simply tweak their portfolio to the timing of the rate cut.

On the upside, the first reclaiming ground is at 103.31, the 55-day Simple Moving Average (SMA), and at the 200-day SMA near 103.71. Once broken through, the 100-day SMA is popping up at 103.74, so a bit of a double cap in that region. Depending on the catalyst that pushes the DXY upwards, 104.96 remains the key level on the topside.

The DXY is trading a bit in nomad's land, with not really any significant support levels nearby. More downside looks inevitable with 102.00 up next, which bears some pivotal relevance. Once through there, the road is open for another leg lower to 100.61, the low of 2023.

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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