- The DXY trades slightly lower on Monday.
- Markets digest recent inflation data and strong S&P PMIs figures.
- Attention shifts to Wednesday’s Fed rate decision.
The US Dollar Index (DXY), which measures the value of the USD against a basket of currencies, trades slightly lower on Monday after a string of data and headlines placed added attention on the upcoming Federal Reserve (Fed) rate decision. The Greenback eases off last week’s strong rally as Chinese economic data and stimulus measures bolster risk appetites.
Despite these developments, rising US Treasury yields help limit losses for the US Dollar, even as the market has priced in a cut on Wednesday. Overall, the currency remains sensitive to incoming data and central bank cues.
Daily digest market movers: US Dollar softens as markets parse hot inflation and solid growth
- The US Dollar shows weakness on Monday even as the S&P Global Composite PMI rose to 56.6 in December from 54.9, while the Services PMI improved to 58.5 from 56.1. The Manufacturing PMI dipped to 48.3, highlighting a mixed backdrop ahead of the Fed decision.
- Regarding last week’s data, the November Producer Price Index (PPI) rose 3.0% YoY, exceeding the 2.6% expectation with a revised 2.6% for October (previously 2.4%).
- Core PPI, excluding food and energy, climbed to 3.4% YoY, beating the 3.2% forecast, and October’s figure was revised to 3.4% (was 3.1%).
- Consumer Price Index data released last week showed signs of persistent price pressure, doing little to ease policymakers’ inflation concerns.
- Despite the higher inflation data, markets fully price in a 25-basis-point Fed cut this week, with officials likely delivering a “hawkish cut” that sets the stage for a pause in January.
DXY technical outlook: Indicators rebound but face tough resistance
Indicators recovered significant ground last week but may lack the momentum to break above the 107.00-108.00 zone. On Monday, the Index has retreated from recent highs, reflecting a pause after last week’s rally.
Still, the outlook remains constructive if the DXY can hold above its 20-day Simple Moving Average (SMA). With mixed data and a pivotal Fed decision looming, traders may remain cautious, awaiting clearer directional cues before pushing the US Dollar materially higher.
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.
