US Dollar consolidates ahead of US PCE release
- The US Dollar trades in the green across the board, although with minor gains.
- All eyes are on the last data point for this week, the PCE inflation gauge.
- The US Dollar Index consolidates and pops back in September’s range.
The US Dollar (USD) trades flat to marginally higher on Friday, with traders looking forward to the release of the Personal Consumption Expenditures (PCE) Price Index for August. The PCE is the Federal Reserve‘s (Fed) preferred inflation gauge in order to determine how their policy rate impacts inflation. With the data-driven decision-making approach for the upcoming policy rate decision in November, the PCE reading can and could be market-moving in case it prints out of consensus.
On the economic data front, looking back to Thursday, it was a very disappointing day with no Fed comment or data point being able to move the needle substantially for the DXY. With only one trading day left, it will either be the PCE number or the University of Michigan Consumer Sentiment reading that might stir up things.
Daily digest market movers: PCE last man standing
- At 12:30 GMT, the Personal Consumption Expenditures Price Index for August will be released:
- Monthly headline PCE is expected to ease to 0.1% from 0.2% previously.
- Monthly core PCE is expected to grow steadily by 0.2%.
- Yearly headline PCE is expected to grow by 2.3% following the 2.5% increase in July.
- Yearly core PCE is expected to increase by 2.7% after a reading of 2.6% the month before.
- Personal Income should rise by 0.4%, coming from 0.3% in July.
- Personal Spending is expected to fall by 0.2% to 0.3%, coming from 0.5%.
- At 14:00 GMT, the University of Michigan will release its final reading for September:
- Consumer Sentiment should tick up to 69.3, from 69.0 in the first reading.
- The 5-year inflation expectation rate is expected to remain stable at 3.1%.
- Asian equity markets are closing the week with a bang as China heads into the Golden Week on a high note. US futures are flat, while European equities are mildly in the green.
- The CME Fedwatch Tool shows a 51.3% chance of a 25 basis-point rate cut at the next Fed meeting on November 7, while 48.7% is pricing in another 50-basis-point rate cut.
- The US 10-year benchmark rate trades at 3.79%, looking to test the three-week high at 3.81%
US Dollar Index Technical Analysis: Markets backtracking
The US Dollar Index (DXY) is hesitant, with the CME Fedwatch tool back at nearly even odds for either a 25 or a 50 basis point rate cut in November. The constant switching between the two possibilities is moving the DXY in a very tight range. A substantial move is needed, and with very small expectations for the PCE number on Friday, it does not look that it will be an eventful Friday.
The upper level of the September range remains at 101.90. Further up, the index could go to 103.18, with the 55-day Simple Moving Average (SMA) at 102.30 along the way. The next tranche up is very misty, with the 100-day SMA at 103.52 and the 200-day SMA at 103.75, just ahead of the big 104.00 round level.
On the downside, 100.22 (the September 18 low) is the first support, and a break could point to more weakness ahead. Should that take place, the low from July 14, 2023, at 99.58, will be the next level to look out for. If that level gives way, early levels from 2023 are coming in near 97.73.
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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