US Dollar retreats after GDP, PCE data meets forecast
- The US Dollar Index plunged toward 106.00 on Wednesday.
- The US Dollar ticked lower, but its losses may be limited as markets are pricing in a more hawkish Fed.
- PCE data from October met expectations for inflation.
In Wednesday’s session, the US Dollar Index (DXY), which measures the value of the USD against a basket of currencies, ticked 1% lower as markets assess the release of high-tier economic data including a Personal Consumption Expenditures (PCE) reading, the Federal Reserve’s (Fed) preferred gauge of inflation.
Daily digest market movers: US Dollar retreats despite sticky inflation data
- Despite US data indicating rising inflation, the DXY remains on the back foot.
- The market is pricing in a more hawkish stance from the Fed, which could lead to less cuts in the near term.
- This hawkish stance is likely contributing to the recent strength of the US Dollar against other currencies.
- Data is showing that the economy keeps doing well with no recession in view.
- The Q3 Gross Domestic Product (GDP) was reported at 2.8% as expected.
- Initial Jobless Claims improved to 213K, better than the expected 217K.
- Durable Goods Orders rose by 0.2% in October, lower than the expected 0.5% but higher than September's -0.4%.
- The PCE Price Index rose by 0.2% MoM and 2.3% YoY as expected. The core PCE annual figure increased by 2.8% YoY, meeting forecasts as well.
DXY technical outlook: Indicators suggest potential consolidation, but uptrend intact
The Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) indicators had been struggling to gain ground lately, and they seemed to have given up on Wednesday as the index retreats to 106.00.
This suggests that the index may be due for a period of consolidation. However, the index remains about its 20,100 and 200-day Simple Moving Averages (SMA), which indicates that the overall momentum remains positive. The DXY is expected to find support at 106.00-106.50 and faces resistance at 108.00.
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact 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 when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
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