The US Dollar (USD) staged a comeback on Wednesday, erasing earlier losses after the US Consumer Price Index (CPI) for July came in line with expectations. This defied the market sentiment following Tuesdayâs softer-than-expected US Producer Price Index (PPI) data, which had prompted USD selling. While the initial reaction to the CPI figures appears contained, further gains for the Dollar could materialize during the US trading session.
Wednesdayâs economic data releases were largely uneventful, as all key numbers were already out. However, the lack of any market-moving surprises from the CPI has shifted attention to Thursdayâs US Retail Sales data. This, combined with the weekly jobless claims release, could generate significant market activity.
Key Market Movers:
Euro/USD hit a fresh high of 1.1029, its highest level since January 2024, ahead of the CPI release, as the US Dollar weakened against the Euro.
Fumio Kishida's decision to step down as Japan's Prime Minister has triggered a political transition.
In a surprise move during the Asian session, the Reserve Bank of New Zealand (RBNZ) announced a 25 basis point interest rate cut, marking the start of a cutting cycle. The bank even hinted at a potential 50 basis point cut at this meeting, sending the New Zealand Dollar 1% lower against the US Dollar.
The Mortgage Bankers Association (MBA) released its weekly Mortgage Applications Index, which rose 6.9% in the week ending August 9, and a stronger 16.8% for this week.
Inflation Insights:
The July headline monthly CPI inflation remained unchanged at 0.2%, while the yearly figure dipped from 3.0% to 2.9%.
Core monthly CPI inflation increased by 0.2% following a 0.1% increase in June, and the yearly gauge softened to 3.2% from 3.3%.
Equity markets are currently trading sideways, struggling to decipher the CPI data's implications for future direction.
Fed Outlook:
The CME Fedwatch Tool suggests a 47.5% chance of a 25 basis point (bps) interest rate cut by the Federal Reserve (Fed) in September, compared to a 52.5% chance of a 50 bps cut. The tool also indicates a 31.5% probability of another 25 bps cut in November (assuming a September cut of 25 bps). There's a 50.8% chance of rates being 75 bps below current levels and a 17.7% chance of a 100 basis point reduction.
The US 10-year benchmark rate currently sits at 3.86%, recovering from earlier losses.
US Dollar Index Technical Analysis:
The US Dollar Index (DXY) retreated from the crucial 103.18 pivot level after Tuesday's surprise PPI release. Technically, a break below 103.00 suggests further downside potential. The DXY will need to decline further, pushing the Relative Strength Index (RSI) into oversold territory, to see ample support and a rebound towards 103.00.
The charts indicate a two-tiered potential recovery, with the first resistance at 103.18. Bulls need to hold and move above this level to push towards the next resistance at 104.00. However, further upside is limited, as the 200-day Simple Moving Average (SMA) at 104.12 could hinder any immediate advance.
On the downside, the RSI indicator has eased its oversold condition on the daily chart, leaving room for a slight dip. Support is nearby at the August 5 low of 102.17. Breaking below this level would put pressure on the psychologically significant 102.00 level before potentially testing 101.90, a pivotal level in December 2023 and January 2024.
*[US Dollar Index Daily Chart]*
(This story was corrected on August 14 at 10:40 GMT to say Reserve Bank of New Zealand, not Royal Bank of New Zealand).
Fed FAQs:
What is the Fed's role in monetary policy? The Federal Reserve (Fed) plays a crucial role in shaping US monetary policy. Its mandate is to achieve price stability and foster full employment. The Fed primarily uses interest rate adjustments to achieve these goals. When inflation is high, the Fed raises interest rates, making borrowing more expensive and strengthening the US Dollar. Conversely, when inflation is low, the Fed may lower interest rates to stimulate borrowing, which tends to weaken the US Dollar.
How does the Fed make policy decisions? The Federal Open Market Committee (FOMC), composed of twelve Fed officials, holds eight policy meetings annually to assess economic conditions and make monetary policy decisions.
What is Quantitative Easing (QE)? In extreme circumstances, the Fed may implement Quantitative Easing (QE), which involves substantially increasing the flow of credit in a distressed financial system. This non-standard policy measure is used during crises or when inflation is extremely low. QE, typically employed during the Great Financial Crisis in 2008, involves the Fed printing more Dollars and using them to purchase high-grade bonds from financial institutions. QE usually weakens the US Dollar.
What is Quantitative Tightening (QT)? Quantitative tightening (QT) is the opposite of QE, where the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from maturing bonds into new purchases. QT generally supports the value of the US Dollar.