- Inflation measured by the CPI in the US accelerated in March.
- Following the hot figures, the odds of a rate cut in June plummeted.
- Hawkish bets on Fed, soaring US Treasury yields benefit USD.
- FOMC minutes saw officials concerned with sticky inflation.
The US Dollar Index (DXY) rallied to 105.20, up by nearly 1%, on Wednesday. The Greenback gained strength on hot inflation figures in the US Consumer Price Index (CPI) for March, which made markets start giving up hope for a June rate cut by the Federal Reserve (Fed).
Following a blockbuster labor market report and hot inflation figures for March, Fed officials may start signaling that they require additional evidence of the economy cooling down. In that sense, US Treasury yields may continue rising, which will benefit the USD.
Daily digest market movers: DXY gains strength on rising inflation figures, hawkish Fed bets
- March CPI showed that headline inflation increased to 3.5% YoY in March, up from 3.2% in February and beating the 3.4% expected.
- The Core CPI measurement, excluding volatile food and energy costs, reflected February’s increase with an annual rise of 3.8% in March. Both the headline and core CPI experienced a 0.4% MoM rise, beating analyst estimates of 0.3%.
- The odds of a Fed cut in June plummeted to 20%.
- US Treasury bond yields rallied with the 2-year yield at 4.93%, the 5-year yield at 4.56%, and the 10-year yield at 4.51%. All three yields rose more than 2%.
- FOMC minutes from March’s meeting, revealed uncertainty on inflation’s persistence amognst the officials, but didn’t provide any new insights on monetary policy.
DXY technical analysis: DXY bulls step in and recover ground
The technical indicators on the daily chart reflect that the buyers are gaining momentum. The Relative Strength Index (RSI) is on a positive slope, well within positive territory, which hints at underlying bullish strength. The Moving Average Convergence Divergence (MACD) follows suit with rising green bars, further validating the positive sentiment hovering over DXY.
Focusing on the Simple Moving Averages (SMAs), the DXY continues to be stationed above its 20, 100 and 200-day SMAs. This essentially suggests a higher ground captured by the bulls against the bears and adds weight to an overall positive prospect.
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.