Market Data 
- The US Dollar retreats further on Wednesday ahead of US CPI release.
- Downward US PPI revisions for March and speculation over China supporting its property sector trigger a wave of Dollar weakness.
- The US Dollar Index drops below 105.00 and sets sail to mid-104.00 range.
The US Dollar (USD) eases on Wednesday and falls below 105.00 ahead of the highly anticipated US Consumer Price Index (CPI) release for April. Overnight, US Federal Reserve (Fed) Chairman Jerome Powell delivered a speech which seemed to prepare markets for the chance that the initial interest rate cut would only come after the summer or even later.
Markets ignored these comments and likely focused solely on the revisions in the Producer Price Index (PPI) numbers, which were all to the downside. Additionally, news that the Chinese government is forming a rescue package to bail out its plagued real estate sector made headlines on Wednesday, seems to put much more pressure on the US Dollar Index (DXY).
On the economic front, the CPI release will take up most of the attention, though Retail Sales data for April are to be released at the same time. So traders can expect volatility to pick up, and should both numbers be mixed or oppose one another, choppy price action is to be expected. Traders can afterwards hear from Federal Reserve Bank of Minneapolis President Neel Kashkari and Federal Reserve Governor Michelle Bowman for any guidance on how to read the inflation release.
Daily digest market movers: Mayhem expected at 12:30 GMT
- At 11:00 GMT, the Mortgage Bankers Association will release its Mortgage Applications index for the week ending May 10. The index increased by 2.6% the previous week.
- At 12:30 GMT, the US economic calendar will include the US CPI and the Retail Sales data for April:
- April CPI numbers:
- Monthly Headline CPI is expected to increase at the same pace as the March reading of 0.4%.
- Yearly Headline CPI is expected to rise 3.4% from 3.5% in March.
- Monthly core CPI is expected to rise by 0.3% in April from 0.4% the previous month.
- Yearly core CPI is expected to rise 3.6% from 3.8% in March.
- April Retail Sales:
- Monthly Retail Sales are expected to rise 0.4% in April from 0.7% in March.
- Retail Sales, excluding cars and transportation, are expected to increase by 0.2% from 1.1% the previous month.
- Note that the revisions could be more market-movers than the actual numbers.
- April CPI numbers:
- At 14:00 GMT, the National Association of Home Builders Housing Market Index for May will be released, and is expected to remain stable at 51.
- Business Inventories for March are also to be released at 14:00 GMT and are expected to head to -0.1% from 0.4%.
- Federal Reserve Bank of Minneapolis President Neel Kashkari will speak at 16:00 GMT. He is a non-voter for this year.
- Federal Reserve Governor Michelle Bowman will take the stage around 19:20 GMT.
- The Qatar World Economic Forum started on Tuesday morning. Headlines from world leaders may come out throughout the week.
- Equities in the US outperformed on Tuesday night at the closing bell, though are trading flat ahead of the start of the US session. European equities are mildly in the green.
- The CME Fedwatch Tool suggests a 91.3% probability that June will still see no change to the Federal Reserve’s fed fund rate. Odds of a rate cut in July are also out of the cards, while for September the tool shows a 49.7% chance that rates will be 25 basis points lower than current levels.
- The benchmark 10-year US Treasury Note trades around 4.42%, the lowest level for this week.
US Dollar Index Technical Analysis: CPI again market moving?
The US Dollar Index (DXY) eases and retraces below the important 105.00 level on Wednesday. All eyes are on the US CPI data, as most market participants now expect this print to confirm that disinflation is still on track. The risk is that any beat on estimates could trigger another shock move in markets with the DXY as biggest winner as expectations show a slowdown in inflation pressures.
On the upside, 105.52 (a pivotal level since April 11) must be recovered, ideally through a daily close above this level, before targeting the April 16 high at 106.52. Further up and above the 107.00 round level, the DXY index could meet resistance at 107.35, the October 3 high.
On the downside, the 55-day and the 200-day Simple Moving Averages (SMAs), currently at 104.69 and 104.34 respectively, have already provided ample support recently. If those levels are unable to hold, the 100-day SMA near 104.09 is the next best candidate.
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact 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 when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
