- The US dollar remained flat on Friday, but is expected to end the week on a stronger note.
- Traders are gearing up for U.S. PPI, while Fed speakers have repeatedly insisted that a rate cut is imminent.
- The USD index is trading above 102.50 but is struggling to break above 103.00.
The US dollar (USD) stabilized on Friday after rising very strongly this week, driven largely by interest rate differentials. The question from next week will be whether this rise in US Treasury rates was a little too much, given that the US Consumer Price Index (CPI) rose only slightly in September compared to the previous month. . This contradicts what several Federal Reserve officials said this week that U.S. interest rates would fall if the Fed confirms further rate cuts.
The economic calendar faces the final piece of the puzzle this week. The release of the US Producer Price Index (PPI) in September will reveal whether the rise in inflation is also noticeable on the production side. The final data point comes from the University of Michigan's preliminary numbers on consumer sentiment and inflation expectations for October.
Daily Digest Market Trends: Michigan Could Be Distorted
- At 12:30 GMT, the US Producer Price Index for September will be released.
- Monthly headline PPI is expected to rise 0.1.% from 0.2% last month, with core PPI similarly expected to decline to 0.2% from 0.3% last month.
- Annual headline PPI inflation is expected to fall to 1.6% from 1.7% in August. Core PPI is expected to be an outlier, increasing by 2.4% to 2.7%.
- At 14:00 GMT, the University of Michigan's preliminary report for October will be released.
- Consumer sentiment is expected to rise to 70.8 from 70.1.
- Consumer inflation expectations for the five-year period as of September were 3.1%, but no forecast has been released.
- Measurements may be skewed by hurricanes in the southern United States.
- There are several Fed speakers to watch on Friday.
- At 1:45 GMT, Austen D. Goolsby, President of the Federal Reserve Bank of Chicago, will deliver opening remarks at the Community Bankers Symposium.
- At 17:10 GMT, Federal Reserve President Michelle Bowman (2024 FOMC voting member) will deliver a virtual talk on community banking at the Chicago Federal Reserve Community Bankers Symposium.
- Stock markets were mixed across the board this Friday, with major European indexes falling while US futures were flat to lower.
- According to the CME FedWatch tool, there is an 84.0% probability of a 25 basis point rate cut at the next FOMC meeting on November 7th, and a 16.0% probability of no rate cut. The possibility of a 50bp rate cut is now fully priced in.
- The US 10-year base interest rate remains at 4.09, hovering above 4%.
Technical analysis of the US dollar index: here comes the caution
This week, the US dollar index (DXY) rose rapidly, shifting market sentiment to the view that rate cuts for the remainder of 2024 may be a certainty. Fed officials remain vocal about further rate cuts in the future, but the current movement in U.S. Treasury rates does not match the message from the Fed. Either the market has fully priced in a rate cut in 2024, which means DXY moves above 103.00, or the rate cut disappears from here as US rates fall.
Psychological 103.00 is the first level for upside. Further up, the chart identifies 103.18 as the very last resistance level for this week. Above that, a very volatile area emerges with the 100-day simple moving average (SMA) at 103.26, the 200-day SMA at 103.77, and the key levels at 103.99-104.00.
On the downside, the 55-day SMA at 101.91 is the first line of defense, supported by the round level at 102.00 and the crucial 101.90 as support to take bearish pressure and trigger a rebound. If that level doesn't work out, 100.62 can also act as support. Looking further down, we should see a test of the year-to-date low of 100.16 before a further decline. Finally, this means abandoning the big 100.00 level and the July 14, 2023 low of 99.58 appears.
US dollar index: daily chart
US Dollar Frequently Asked Questions
The United States Dollar (USD) is the official currency of the United States and the “de facto” currency of many other countries, circulating alongside local paper currency. It is the world's most frequently traded currency, accounting for more than 88% of the world's foreign currency trading volume, with an average daily trading value of $6.6 trillion. data After World War II, the US dollar replaced the British pound as the world's reserve currency. For most of its history, the U.S. dollar was backed by gold until the 1971 Bretton Woods agreement abolished the gold standard.
The most important single factor influencing the value of the US dollar is the monetary policy formed by the Federal Reserve System (Fed). The Fed has two responsibilities: achieving price stability (controlling inflation) and promoting full employment. The main tool to achieve these two goals is to adjust interest rates. If prices rise too fast and inflation exceeds the Fed's 2% target, the Fed will raise interest rates to support the value of the U.S. dollar. If inflation falls below 2% or unemployment is too high, the Fed could cut interest rates, which would weigh on the dollar.
In extreme circumstances, the Federal Reserve could also print more dollars and implement quantitative easing (QE). QE is a process by which the Fed significantly increases the flow of credit in a stalled financial system. This is a non-standard policy tool used when credit is exhausted because banks do not lend to each other (for fear of default by the other party). It is a last resort when simply lowering your interest rate does not seem to produce the desired results. This was the Fed's weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis of 2008. This involves the Fed printing more dollars and using it to buy U.S. Treasuries, primarily from financial institutions. QE usually leads to a weaker US dollar.
Quantitative tightening (QT) is the opposite process in which the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal of maturing bonds in new purchases. Usually positive for the US dollar.
