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US Dollar enjoys steady trading for now going into PCE

  • The US Dollar trades flat, looking for direction on this Friday. 
  • All eyes are on the last data point for this week with the PCE inflation gauge. 
  • The US Dollar Index consolidates and pops back in September’s range.  

The US Dollar (USD) trades flat to marginally higher on Friday, with traders looking forward to the release of the Personal Consumption Expenditures (PCE) Price Index for August. The PCE is the Federal Reserve‘s (Fed) preferred inflation gauge in order to determine how their policy rate impacts inflation. With the data-driven decision-making approach for the upcoming policy rate decision in November, the PCE reading can and could be market-moving in case it prints out of consensus. 

On the economic data front, looking back to Thursday, it was a very disappointing day with no Fed comment or data point being able to move the needle substantially for the DXY. With only one trading day left, it will either be the PCE number or the University of Michigan Consumer Sentiment reading that might stir up things. 

Daily digest market movers: Last chance for DXY to move

  • At 12:30 GMT, the Personal Consumption Expenditures Price Index  for August will be released:
    • Monthly headline PCE is expected to ease to 0.1% from 0.2% previously.
    • Monthly core PCE is expected to grow steadily by 0.2%.
    • Yearly headline PCE is expected to grow by 2.3% following the 2.5% increase in July.
    • Yearly core PCE is expected to increase by 2.7% after a reading of 2.6% the month before.
    • Personal Income should rise by 0.4%, coming from 0.3% in July.
    • Personal Spending is expected to fall by 0.2% to 0.3%, coming from 0.5%.
  • At 14:00 GMT, the University of Michigan will release its final reading for September:
    • Consumer Sentiment should tick up to 69.3, from 69.0 in the first reading.
    • The 5-year inflation expectation rate is expected to remain stable at 3.1%.
  • Asian equity markets are closing the week with a bang as China heads into the Golden Week on a high note. US futures are flat, while European equities are mildly in the green. 
  • The CME Fedwatch Tool shows a 51.3% chance of a 25 basis-point rate cut at the next Fed meeting on November 7, while 48.7% is pricing in another 50-basis-point rate cut. 
  • The US 10-year benchmark rate trades at 3.79%, looking to test the three-week high at 3.81%

US Dollar Index Technical Analysis: Flip flopping in between rate cut sizes

The US Dollar Index (DXY) is hesitant, with the CME Fedwatch tool back at nearly even odds for either a 25 or a 50 basis point rate cut in November. The constant switching between the two possibilities is moving the DXY in a very tight range. A substantial move is needed, and with very small expectations for the PCE number on Friday, it does not look that it will be an eventful Friday. 

The upper level of the September range remains at 101.90. Further up, the index could go to 103.18, with the 55-day Simple Moving Average (SMA) at 102.30 along the way. The next tranche up is very misty, with the 100-day SMA at 103.52 and the 200-day SMA at 103.75, just ahead of the big 104.00 round level. 

On the downside, 100.22 (the September 18 low) is the first support, and a break could point to more weakness ahead.  Should that take place, the low from July 14, 2023, at 99.58, will be the next level to look out for. If that level gives way, early levels from 2023 are coming in near 97.73.

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.