Forex Trading, News, Systems and More

US Dollar ticks up after softer CPI boosts confidence on US stamina

  • The US Dollar trades flat to a touch higher after US CPI release on Wednesday.
  • Traders see inflation roll off quicker than expected in February.
  • The US Dollar Index holds in the mid-103.00 area with markets digesting the recent inflation reading. 

The US Dollar Index (DXY), which tracks the performance of the US Dollar (USD) against six major currencies, trades in the green for the first time this week while traders digest the United States (US) Consumer Price Index (CPI) release for February. Both yearly and montly numbers for the core and headline inflation came in below expectations, which means that inflation was still slowing in February ahead of the tariffs US President Donald Trump imposed at the start of March. 

On the geopolitical front, China again vowed to retaliate on US tariffs. Meanwhile, Europe is set to issue countermeasures on April 13, European Union (EU) leader Ursula Von Der Leyen said this Wednesday. Overnight headlines emerged on the Ukraine-Russia war, where a ceasefire truce is on the table after Ukraine agreed to a brokered deal by the US. The ball is now in the court of Russia to support or refuse it. 

Daily digest market movers: Softer means good

  • The US Consumer Price Index (CPI) report for February has been released:
    • The monthly headline inflation came in at 0.2%, below the 0.3% consensus and further down from 0.5% in January. Core inflation eased to 0.2%, a touch softer than the expected 0.3% and from 0.4% previously.
    • The yearly headline reading came in at 2.8%, just below the 2.9% consensus and down from 3.0% in January. The core gauge softens to 3.1%, below the 3.2% estimate and down from 3.3% in the previous month. 
    • A much softer reading in inflation data should boost rate-cut bets for the Federal Reserve (Fed) and result in another drop in the US Dollar. 
  • Around 17:00 GMT, the US Treasury will auction a 10-year Note. 
  • At 17:35 GMT, St. Louis Fed President Alberto Musalem will speak at the NABE Economic Policy Conference in Washington, D.C.
  • Equities are seeing overall more than 1% gains with European and US equity indices rallying higher after the US CPI release. 
  • The CME Fedwatch Tool projects a 97.0% chance for no interest rate changes in the upcoming Fed meeting on March 19. The chances of a rate cut at the May 7 meeting stand at 37.6% and 81.7% at June’s meeting.
  • The US 10-year yield trades around 4.31%, off its near five-month low of 4.10% printed on March 4.

US Dollar Index Technical Analysis: Rangebound

The US Dollar Index (DXY) still faces potential selling pressure as recession fears remain. Traders are concerned about tariffs’ impact and uncertainty on the US economy. A softer inflation reading could help take away the recession fear, though it would still result in a weaker US Dollar with an increasing Federal Reserve’s rate cut bets and a declining rate differential with other countries as main drivers. 

Upside risk is the fear of a rejection at 104.00 that could result in more downturn. If bulls can avoid that, look for a large sprint higher towards the 105.00 round level, with the 200-day Simple Moving Average (SMA) at 105.03. Once broken through that zone, a string of pivotal levels, such as 105.53 and 105.89, will present as caps. 

On the downside, the  103.00 round level could be considered a bearish target in case US yields roll off again, with even 101.90 not unthinkable if markets further capitulate on their long-term US Dollar holdings. 

US Dollar Index: Daily Chart

Central banks FAQs

Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.

A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.

A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.

Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.