US Dollar in calm water drifting towards the weekend

The US Dollar locks in gains for this week after hotter-than-expected US CPI and PPI figures.
Traders are pushing the initial Fed rate cut towards September.
The US Dollar Index trades at a crucial pivotal level that could unlock 104.00.

The US Dollar (USD) trades in the green on Friday after markets got shaken on Thursday after a badge of US economic data suggested inflation pressures are far from over. A textbook panic attack took place in markets, with risk assets such as equities and Bitcoin selling off, yields jumping higher with bonds being sold and the US Dollar strengthening against everything. The surprise uptick in the Produce Price Index (PPI) numbers spooked investors, who rushed to reprice the first interest-rate cut by the Federal Reserve (Fed) away from June and towards September.

On Friday’s economic calendar, there are some lighter data set to be released. Still, many investors will be set to square their positions for this week ahead of the US Federal Reserve rate decision next week and the risk event of the Bank of Japan, which could opt for hiking interest rates for the first time in decades. For this Friday, the Import and Export prices data and the preliminary data from the University of Michigan Consumer Sentiment and Inflation Expectations for March did not hold any surprises big enough to move the needle for this week.

Daily digest market movers: Friday's data was not important

At 12:30, Import and Export price data for February will be released:
- The monthly Import price Index headed from 0.8% to 0.3%, while the Yearly Import Index fell by 0.8% in January.
- The monthly Export price Index declined from 0.0% to 0.8%. The Yearly Export Index fell by 1.8% in January.
- The New York Empire State Manufacturing Index for March did a nosedive move from -2.4 to -20.9.
At 13:15 GMT, both Industrial Production and Capacity Utilization data for February were released. Production remained roughly stable, from -0.5% to 0.1%. Capacity Utilization was unchanged at 78.3%.
The last data number for this Friday, the University of Michigan was released at 14:00 GMT:
- Consumer Sentiment for March came in a little bit lower from 76.9 to 76.5
- Inflation expectations were at 2.9% in February, which is unchanged.
Equities are carefully in the green after the bloodbath on both the European and US equity markets. European indices are though mildly in the green while US futures are flat ahead of the US opening.
According to the CME Group’s FedWatch Tool, expectations for a Fed pause in the March 20 meeting are at 99%, while chances of a rate cut stand at 1%. The odds of a June rate cut are around 60%, below the above 70% priced in a week ago.
The benchmark 10-year US Treasury Note trades around 4.32%, the highest level this week.

US Dollar Index Technical Analysis: Brief return

The US Dollar Index (DXY) –not Elvis Presley of course – made its way back to the stage on Thursday after markets got shaken with the US Dollar as the sole winner. Although the PPI numbers might have sparked some worries on the June timing, it is again a mere repricing, by moving the probability for that initial rate cut from June to September. It is the same story we have seen year-to-date, which means that the probability of the DXY falling back to 103.00 is substantially bigger than rallying back up to 104.00.

On the upside, the 55-day Simple Moving Average (SMA) at 103.42 is facing some pressure. Not far above, a double barrier is set to hit with the 100-day SMA near 103.68 and the 200-day SMA near 103.70. Depending on the catalyst that pushes the DXY upwards, 104.96 remains the key level on the topside.

As mentioned in the opening paragraph on technical analysis, the move from Thursday already covers that pushback of a rate cut to September, and a move further down the line to December looks very unlikely. More downside thus, looks inevitable once markets move forward again to the June probability, with 103.00 and 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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