US Dollar ticks higher as Gilts wobble under inflation pressure, eyes on NFPs
- Traders remain alert to potential Chinese stimulus effects, though the US Dollar’s upward trajectory looks steady on Thursday.
- Intensifying concerns over rising consumer prices triggered a mini-crisis in Gilts, enhancing safe-haven demand for the USD.
- Steady labor market data, cautious FOMC Minutes, and anticipation of Friday’s December Nonfarm Payrolls further underpin Greenback strength.
The US Dollar Index (DXY), which measures the value of the USD against a basket of currencies, ticks up on inflation woes, with the Greenback consolidating at current levels. Inflation concerns take over and trigger a mini-crisis in the UK’s Gilts. The DXY currently orbits the 109.00 mark, supported by robust demand amid ongoing monetary policy tightening signals. Now, investors’ eyes are on Friday’s US Nonfarm Payrolls (NFP) for December.
Daily digest market movers: USD sees gains as markets assess FOMC Minutes as NFP looms
- Initial Jobless Claims fell to 201K in the week ending January 4, better than the 218K consensus. Meanwhile, ADP reported 122K private-sector jobs in December, below expectations.
- FOMC Meeting Minutes highlight placeholder assumptions on trade and immigration policies, with officials concerned about inflation possibly taking longer to reach 2%. Most participants backed a 25 bps cut in December, but upside inflation risks pushed policymakers toward caution.
- US yields stabilize as the 10-year hovers near 4.67%, while the 30-year yield sits around 4.90% after a heavy auction week. Despite earlier lukewarm demand for 10-year notes, 30-year bonds saw solid uptake, reflecting investor resilience.
- Loose financial conditions continue with the Chicago Fed’s indicator loosening for ten straight weeks, helping spur growth as the Fed readies for potential fiscal stimulus down the road.
- Markets gear up for December NFP data on Friday, with investors expecting clarity on labor market momentum and possible policy implications. The headline figure is expected to come down from 227,000 to 160,000.
DXY technical outlook: Indicators hold upward traction but begin to flatten
The US Dollar Index defended its 20-day Simple Moving Average (SMA), maintaining a constructive bias despite intermittent pullbacks. Technical indicators still tilt positive, though they appear to be flattening rather than accelerating further.
Key support rests around 108.40, followed by 108.00 if bearish momentum picks up. As long as inflation concerns and steady yields persist, the DXY may retain its elevated stance near 109.00, albeit with narrower trading ranges in the near term.
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.
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