- The DXY Index stands at 103.45 on Monday, down by 0.35% on the session.
- The US won’t release high-tier economic reports this week, and the November FOMC Minutes will be the week’s highlight.
- US yields slightly recovered from September lows.
At the start of the week, the US Dollar, measured by the DXY index, declined toward 103.45 and saw a 0.35% loss. On Friday, the Greenback closed its worst week since July, tallying a 1.80% weekly loss, driven by the expectations of a less aggressive stance by the Federal Reserve (Fed) following the release of lighter inflation figures last week.
In line with that, the Consumer Price Index (CPI) in the United States in October decelerated to 3.2% YoY, and the core CPI fell to 4% YoY. In that sense, markets cheered that the softening inflation may influence a less aggressive Fed, and investors are now taking off the table a hike at the December meeting and foreseeing sooner rate cuts in 2024.
Daily Digest Market Movers: US continues to weaken after soft inflation
- The US Dollar Index started the week on a weak note, falling by 0.35% to 104.35.
- Investors are still digesting last week’s inflation data from October in the US.
- The US Bureau of Labor Statistics reported that October’s Core Consumer Price Index (CPI) missed the consensus. It came in at 4% YoY vs the expected 4.1% and decelerated from its previous figure of 4.1%.
- The headline figure came in at 3.2%YoY, below the consensus of 3.3% and in relation to its last reading of 3.7%.
- In addition, the Core Producer Price Index (PPI) from October fell short of expectations. It came in at 2.4% YoY vs the expected 2.7% and declined from its previous reading of 2.7%.
- On the other hand, Retail Sales from October came in better than expected, declining by 0.1% MoM vs the expected 0.3% decline.
- During the week ending November 11, the number of US Initial Jobless Claims increased to 231,000, surpassing the predicted 220,000.
- Industrial Production in the United States fell short of expectations, experiencing a 0.6% MoM decline, higher than the -0.3% expected. It also tallied a YoY decrease of 0.7%.
- The combination of softening inflation, decelerating job creation, and signs of weakening economic activity made markets confident that the Fed won’t risk hiking again.
- As a reaction, the 2, 5 and 10-year rates declined to their lowest levels since early November and mid-September, adding selling pressure to the US Dollar. On Monday, those rates increased to 4.91%, 4.46% and 4.45%, respectively, which could limit the Greenback’s downside.
- In the meantime, according to the CME FedWatch Tool, investors have already priced in a no hike in December and are betting on rate cuts sooner than expected in May 2024. A sizable minority is even betting on a rate cut in March.
- The week’s highlights include the Federal Open Market Committee (FOMC) November minutes, October’s Durable Goods Orders on Wednesday, and S&P PMIs from November on Friday.
Technical Analysis: US Dollar bears step in with RSI approaching oversold conditions
According to the daily chart, the DXY Index displays a bearish bias with increasing selling pressure, indicating a shift favouring the bears. The Relative Strength Index (RSI) is getting nearer to oversold conditions, signaling that an upward correction may be incoming, while the Moving Average Convergence (MACD) histogram exhibits larger red bars.
On the broader scale, the index is below the 20, 100 and 200-day Simple Moving Averages (SMAs), suggesting that the buyers are struggling to overcome the overall bearish trend and the bears are still in charge.
Support levels: 103.30, 103.15, 103.00.
Resistance levels: 103.60 (200-day SMA), 104.20 (100-day SMA),104.50.
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.