US Dollar braces for US CPI amidst geopolitical headlines
- The US Dollar trades broadly flat and stabilizes after a downbeat day on Tuesday.
- Traders brace for the February US CPI release on Wednesday.
- The US Dollar Index holds in the mid-103.00 area after bouncing off a pivotal level.
The US Dollar Index (DXY), which tracks the performance of the US Dollar (USD) against six major currencies, trades broadly flat and stabilizes on Wednesday while traders await the United States (US) Consumer Price Index (CPI) release for February. The consensus view is that the monthly and yearly gauges on the core and headline inflation data should ease a little from previous readings. That consensus view will be an interesting match with the analysts’ and economists’ forecasts, who have been eagerly releasing comments over the past few weeks that US President Donald Trump’s tariffs are inflationary.
On the geopolitical front, China again vowed to retaliate on US tariffs. Meanwhile, Europe is set to issue countermeasures on April 13, European Union (EU) leader Ursula Von Der Leyen said this Wednesday. Overnight headlines emerged on the Ukraine-Russia war, where a ceasefire truce is on the table after Ukraine agreed to a brokered deal by the US. The ball is now in the court of Russia to support or refuse it.
Daily digest market movers: Last CPI as an anomaly
- At 12:30 GMT, the US Consumer Price Index (CPI) report for February will be released:
- The monthly headline inflation is expected to ease to 0.3% from 0.5% in January. Core inflation is set to ease to 0.3% from 0.4% previously.
- The yearly headline reading is expected to decelerate to 2.9% from 3.0% in January. The core gauge is set to soften to 3.2% from 3.3% the previous month.
- A much softer reading in inflation data should boost rate-cut bets for the Federal Reserve (Fed) and result in another drop in the US Dollar.
- Around 17:00 GMT, the US Treasury will auction a 10-year Note.
- At 17:35 GMT, St. Louis Fed President Alberto Musalem will speak at the NABE Economic Policy Conference in Washington, D.C.
- Equities are enjoying a big sigh of relief with a ceasefire deal on the table for Ukraine. In Europe, all indices are up over 1%.
- The CME Fedwatch Tool projects a 97.0% chance for no interest rate changes in the upcoming Fed meeting on March 19. The chances of a rate cut at the May 7 meeting stand at 37.6% and 81.7% at June’s meeting.
- The US 10-year yield trades around 4.27%, off its near five-month low of 4.10% printed on March 4.
US Dollar Index Technical Analysis: Not a one-day event
The US Dollar Index (DXY) still faces potential selling pressure as recession fears remain. Traders are concerned about tariffs’ impact and uncertainty on the US economy. A softer inflation reading could help take away the recession fear, though it would still result in a weaker US Dollar with an increasing Federal Reserve’s rate cut bets and a declining rate differential with other countries as main drivers.
Upside risk is the fear of a rejection at 104.00 that could result in more downturn. If bulls can avoid that, look for a large sprint higher towards the 105.00 round level, with the 200-day Simple Moving Average (SMA) at 105.03. Once broken through that zone, a string of pivotal levels, such as 105.53 and 105.89, will present as caps.
On the downside, the 103.00 round level could be considered a bearish target in case US yields roll off again, with even 101.90 not unthinkable if markets further capitulate on their long-term US Dollar holdings.
US Dollar Index: Daily Chart
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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