- DXY Index is currently trading at 104.15 with mild losses.
- March’s CPI report is due on Wednesday, investors will monitor its outcome for more direction on the economy’s health.
- Markets still expect the Fed’s easing cycle to start in June.
The US Dollar Index (DXY) is currently trading at a modest loss at the 104.15 level. Mild market fluctuations for the USD continue to make waves as the Federal Reserve’s (Fed) cautious stance is calibrated in light of incoming data. Hot labor market figures reported last week may justify the delay of the easing cycle, while Fed officials ask for patience.
The US economy has yet to show clear evidence of a moderation of inflation and economic activity, which makes the Fed comfortable to start cutting rates. In case data shows a resilient economy and easing expectations adjust, the USD may see further upside.
Daily digest market movers: DXY losses limited by US economy strength and rising Treasury yields
- Given the current steady expansion and continued inflation in the US economy, the Fed stays wary of modifying monetary policy and its officials ask for caution.
- Markets are still pricing in higher odds of around 60% of the easing cycle to start in June.
- US Treasury bond yields demonstrate a slight increase. The 2-year yield stands at 4.78%, the 5-year at 4.41%, and the 10-year at 4.33%.
- On Wednesday, the US will release Consumer Price Index (CPI) data from March, a crucial inflation indicator.
- The headline figure is seen accelerating, while the core measure is seen cooling down. The outcome of the index will likely fuel volatility in the USD dynamic via movements in Treasury yields and Fed expectations.
DXY technical analysis: DXY bulls remain weak with bears around the corner
The indicators on the daily chart reflect a mixed sentiment in the market. The Relative Strength Index (RSI) has a negative slope but maintains itself in positive territory, indicating that there’s uncertainty among the market participants and a lack of a firm directional bias.
In addition, there may be a hint of bearish momentum as the Moving Average Convergence Divergence (MACD) indicator shows decreasing green bars, signifying a possible slowdown in the buying power. This could mean that the bears are slowly gaining the upper hand. However, the DXY is positioned above its 20, 100 and 200-day Simple Moving Averages (SMAs), insinuating an underlying bullish sentiment.
Fed FAQs
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.
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.
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.
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.
