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- The Greenback trades in the green against all major currencies.
- US traders are seeing PCE confirming sticky pace of inflation.
- The US Dollar Index climbs above 103 and could still flip this week’s overall performance into positive territory.
The US Dollar (USD) bulls are being back by Wednesday and Thursday’s data points, confirming that the US economy is not dead just yet; and that inflation is not coming down that quickly as expected. With the Personal Consumption Expenditures, the preferred inflation gauge from the US Federal Reserve, traders got a look under the hood on what US inflation is doing. It is a much-telling tale of two speeds where cleary European inflation is almost free-falling, while US inflation is rather sticky and only goes down in babysteps.
On the economic front, all, or at least most important datapoints are behind us for this Thursday. The fact that nearly all PCE elements, both Headline and Core Expenditures fell in line of expectations, shows that the Fed is still right to say that inflation is a force to be reckoned with. The Initial Jobless Claims back that view as no major uptick in unemployment is being noted for this week.
Daily digest: The data tells it all
- At 13:30 GMT, this Thursday a big batch of data points was released:
- US Initial Jobless Claims are expected to head from 211,00 to 218,000.
- Continuing Jobless Claims were at 1,840,000 and went to 1,927,000.
- Monthly Headline Personal Consumption Expenditures Price Index for October went from 0.4% to 0%.
- Headline Personal Consumption Expenditures Price Index on a yearly basis went from 3.4% to 3%.
- Monthly Core Personal Consumption Expenditures Price Index for October went from 0.3% to 0.2%, as expected.
- Core Personal Consumption Expenditures Price Index on a yearly basis went from 3.7% to 3.5%, as well as expected.
- Personal Income for October went from a revised down 0.4% to 0.2%.
- Personal Spending for October went from 0.7% to 0.2%.
- Near 14:05, New York Fed President John Williams will speak.
- The Chicago Purchasing Managers Index is due, staying in contraction from 44 to 45.4.
- At 15:00, the Pending Home Sales index will come out for October, with the monthly performance shrinking from 1.1% to -2%, while the yearly performance is expected to head from -11% to -8.8%.
- Right at the end of this Thursday, the US Treasury is heading to markets to allocate a 4-week bill.
- Equities are on track to print one of the best performing November in a long time. After a few days of hesitation, indices across the globe are in the green with all Asian major indices increasing near 0.50%. European equities are marginally in profit, while US Futures are rather in line with Asian profits, near 0.50%.
- The CME Group’s FedWatch Tool shows that markets are pricing in a 95.8% chance that the Federal Reserve will keep interest rates unchanged at its meeting in December.
- The benchmark 10-year US Treasury Note trades at 4.29%, and is finding a floor after the earlier decline this week.
US Dollar Index technical analysis: A pullback was due
The US Dollar has been stretched long and far enough in its devaluation – like an elastic band. Earlier this week the Relative Strength Index (RSI) was indicating that the elastic band was overstretched to the downside after entering oversold, and some unwinding was granted. The unwinding is starting to take place and could still put this weekly performance of the US Dollar Index (DXY) in the green if the current trend continues into Friday’s US close.
The DXY is making its way up towards the 200-day Simple Moving Average (SMA), which is near 103.59. The DXY could still make it back up there, should US traders come back in the market and start buying the current dip. A two-tiered pattern of a daily close lower followed by an opening higher would quickly see the DXY back above 104.28, with the 200-day and 100-day SMA turned over to support levels.
To the downside, historic levels from August are coming into play, when the Greenback summer rally took place. The lows of June make sense to look for some support, near 101.92, just below 102. Should more events take place that initiate further declines in US rates, expect to see a near full unwind of the 2023 summer rally, heading to 100.82, followed by 100.00 and 99.41.
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.