- April’s US Producer Price Index prints higher monthly reading than expected.
- Fed Chair Jerome Powell signals strong US economic outlook, which may delay interest rate cuts.
- Markets await CPI data on Wednesday to continue placing their bets on the easing cycle of the Fed.
The US Dollar Index (DXY) is currently trading at around 105.35, displaying minimal losses. The US Producer Price Index (PPI) showed no surprise on the annual print, but monthly prices rose more than expected. Jerome Powell attached to the script given in the last Federal Reserve (Fed) decision that interest rates might have to be kept higher for longer but that cuts will eventually come and inflation will get back to target.
The US economy is displaying robust growth and persistent inflation, which is making the Fed remain cautious about cutting rates. On Wednesday, April’s Consumer Price Index (CPI) data will likely impact the expectations on the easing cycle, which is seen starting in September.
Daily digest market movers: DXY is mildly down as markets digest PPI data ahead of CPI
- US Bureau of Labor Statistics revealed that the Producer Price Index (PPI) increased by 2.2% on a yearly basis in April. Annual core PPI and monthly core PPI both posted a rise of 2.4% and 0.5%, respectively, in line with March figures.
- Both PPI and core PPI reported a 0.5% rise in April MoM.
- The odds of a cut in June and July remain low as the best-case scenario for the markets at the moment is that the Fed will start cutting in September. A cut in November is fully priced in.
DXY technical analysis: DXY posts correctives but maintains bullish bias
On the daily chart, the Relative Strength Index (RSI) traces a negative slope in negative territory, which indicates that selling momentum is still present. In addition, the Moving Average Convergence Divergence (MACD) shows rising red bars, which demonstrates increasing bearish momentum in the short-term outlook.
That being said, the DXY’s position relative to its Simple Moving Averages (SMAs) paints a different picture. Currently, the index is below the 20-day SMA, showcasing the recent bearish control, but the fact that it is above the 100 and 200-day SMAs points out that the underpinning support from the bulls is not all lost.
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.