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US Dollar holds its ground as PCE data looms

  • The Q4 US GDP was revised higher to 3.4%, while Initial Jobless Claims came strong.
  • The March Chicago PMI came in lower than expected.
  • US Treasury yields stand mixed and limit the upside for the USD.

The US Dollar Index (DXY) initially soared to 104.70 but then stabilized at 104.50. On the positive side, Gross Domestic Product (GDP) revision and strong weekly Initial Jobless Claims figures from the US benefited the Greenback. But the weaker-than-expected Chicago PMI seems to have brought down the USD’s momentum.

The US economy appears steady with the Federal Reserve’s (Fed) stance treading a cautious path. Despite upward revisions in inflation projections, the Fed, under Powell’s guidance, refrains from overreacting to short-term spikes in inflation. The speculated start of an easing cycle in June remains dependent on incoming data. 

Daily digest market movers: DXY fails to hold its rally to highs since February, eyes on PCE

  • Unemployment data came in slightly below consensus at 210K against the anticipated 215K for the week ending on March 23.
  •  Q4 Gross Domestic Product (GDP) was revised higher to a yearly growth of 3.4%.
  • On the negative side, the March Chicago Purchasing Managers Index (PMI) data released by the Institute for Supply Management was below expectations at 41.4, against the forecasted 46 and previous 44.
  • US Treasury bond yields show mixed results with the 2-year yield at 4.60%, 5-year yield at 4.20%, and 10-year yield at 4.19%.
  • The probability of a rate cut in June has dropped to 66% compared to 85% at the beginning of the week, which seems to be cushioning the Greenback.
  • The week’s highlight will be the headline Personal Consumption Expenditures (PCE) due on Friday, which is expected to have risen by 2.5% YoY, while the core measure is seen coming in at 2.8%. 
  • The outcome of the Fed’s preferred gauge of inflation will dictate the pace of the USD for the short term.

DXY technical analysis: DXY bulls are in command, but struggle to make a significant upward move

The Relative Strength Index (RSI) is mildly up around 60, while the Moving Average Convergence Divergence (MACD) manifests green bars that suggest a presence of bullish momentum. Yet it remains to be seen if the current buying traction can spur the DXY to higher levels as the MACD is also hinting at limited upward potential.

Looking broadly, the DXY sits comfortably above the 20, 100 and 200-day Simple Moving Averages (SMAs), indicating that the buying momentum is stronger in a larger context. This suggests that despite short-term bearish undertones, the bulls have a firmer grip in the long run.

Despite their dominance, the bulls are currently steady but seem to be struggling to gain more ground, which can impact the short-term dynamic of the DXY. 

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.