- The US dollar index plunged towards 106.00 on Wednesday.
- The dollar has fallen, but the market is pricing in a more hawkish Fed, so losses could be limited.
- October's PCE data met inflation expectations.
In Wednesday trading, the U.S. Dollar Index (DXY), which measures the value of the U.S. dollar against a basket of currencies, fell 1% as markets evaluated the release of top economic data, including personal consumption expenditure (PCE) measures. A measure of inflation recommended by the Federal Reserve System (Fed).
A daily digest that moves the markets: USD weakens despite volatile inflation data
- Despite US statistics showing rising inflation, DXY continues to be on the downside.
- Markets are pricing in a more hawkish stance from the Fed, which could lead to fewer interest rate cuts in the near term.
- This hawkish stance is likely contributing to the recent appreciation of the US dollar against other currencies.
- Data shows the economy remains strong with no recession in sight.
- Gross domestic product (GDP) for the third quarter was reported at 2.8%, as expected.
- Initial jobless claims improved to 213,000, higher than expectations of 217,000.
- Orders for durable goods rose 0.2% in October, lower than the 0.5% expected increase but higher than the 0.4% decline seen in September.
- The PCE price index rose 0.2% month-on-month and 2.3% year-on-year, as expected. Core PCE annual numbers increased 2.8% year over year, also meeting expectations.
DXY technical outlook: Indicators point to possible consolidation, but uptrend remains
The Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) indicators have struggled to make gains of late and appeared to have given up on Wednesday as the index retreated to 106.00.
This suggests that the index may be undergoing a period of consolidation. However, the index remains near its 20,100-day and 200-day simple moving averages (SMAs), indicating that overall momentum remains positive. DXY is expected to have support between 106.00 and 106.50 and resistance at 108.00.
Fed Frequently Asked Questions
Monetary policy in the United States is shaped by the Federal Reserve Board (Fed). The Fed has two responsibilities: achieving price stability and promoting full employment. The main tool to achieve these goals is to adjust interest rates. If prices rise too fast and inflation exceeds the Fed's 2% target, interest rates will be raised, increasing borrowing costs for the entire economy. This makes the US a more attractive place for international investors to put their money, and the US dollar (USD) appreciates. If inflation falls below 2% or unemployment is too high, the Fed could lower interest rates to encourage borrowing, which would weigh on the dollar.
The Federal Reserve (Fed) holds eight annual policy meetings where the Federal Open Market Committee (FOMC) assesses economic conditions and decides on monetary policy. Twelve Fed officials will attend the FOMC meeting. Seven board members, the president of the New York Fed, and four of the remaining 11 regional reserve bank presidents will serve rotating one-year terms. .
In extreme circumstances, the Federal Reserve may resort to a policy called 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 in times of crisis or when inflation is extremely low. This was the Fed's weapon of choice during the Great Financial Crisis of 2008. This involves the Fed printing more dollars and using them to buy high-quality bonds from financial institutions. QE typically weakens the US dollar.
Quantitative tightening (QT) is the reverse process of quantitative easing, in which the Federal Reserve stops buying bonds from financial institutions and reinvests the principal of maturing bonds to buy new bonds. Never. It is usually positive for the value of the US dollar.
