- US Dollar pauses its retreat just 30 minutes before the US Consumper Price Index is set to come out.
- Traders have already priced in a drop in US inflation numbers and assume no rate hike for this week from the US Federale Reserve.
- US Dollar Index holds just above 103.20 and broke the low of Monday, continuing its declining pattern.
The US Dollar (USD) has come off its most weakest point of the day against several of its peers, and looks to be awaiting the US inflation numbers that are set to hit markets in 30 minutes. The USD weakened substantially this morning during the ASIA PAC and European session, influenced by a surprise rate cut by China People’s Bank Of China (PBOC) cutting its 7-day Reverse Repo rate to 1.9% from 2% and committing to further stimulus for the much-battered construction sector. Additionally to the move, traders are reducing a bit of risk against the Greenback, maybe anticipating a lower-than-expected US Consumer Price Index (CPI) inflation print later in the trading session.
For that US CPI release, the market is expecting a drop on all fronts, with the most notable being the headline CPI YoY figure, which is set to drop from previous 4.9% to 4.1%, according to market consensus. Lowest estimate for that number is 4.0% while the highest estimate is for 4.3%. Expect to see a big move downward in the US Dollar Index should the actual number come out at 4.1% or lower. An inverse result of course should US CPI come out at 4.3% or higher, the US Dollar would rally higher in the likelihood that the Fed will need to do more rate hikes than projected at the moment.
Daily digest: US Dollar to see pickup on volatility
- Bank of America Merril Lynch’s monthly fund manager survey reveals that keeping investments in cash has dropped to 5.1%, which is a 19-month low. Long Big tech and short China looks to be the consensus trade amongst several funds.
- US National Federation of Independent Businesses (NFIB) printed its Small Business Optimism which jumped to 89.4 from 89 previous. Expectation was for 88.5.
- US Consumer Price Index numbers are set to come out on Tuesday at 12:30 GMT, with headline and core figures for monthly and annual prints. Overall CPI MoM expected at 0.2%, coming from 0.4%, while the YoY is expected to fall from 4.9% to 4.1%. The core inflation MoM should remain steady at 0.4% while YoY drops from 5.5% to 5.3%.
- The Federal Open Market Committee (FOMC) is set to start its two-day meeting where Federal Reserve board voters will make a rate decision announced on Wednesday.
- In the run-up to the Fed rate decision announcement on Wednesday with the speech by US Federal Reserve Chairman Jerome Powell, a few analysts have warned that the dot-plot or Phillips curve could hold a hawkish surprise and might trigger kneejerk reaction in the Greenback. The Phillips curve or dot-plot is where each Fed member pencils in their projection on where rate should go in the nearterm.
- The US Treasury will head to markets again to allot a 30-year and 1-year bond auction.
- China weighs broader stimulus with property support and more rate cuts after it announced a rate cut in its 7-day Reverse Repo Rate from 2.0% to 1.9%.
- US equity futures rallied substantially on Monday and the party does not look to be over. All major indices in Asia and Europe are in the green, though off the intraday highs, while US equity futures are marginally in the green. Japan’s Nikkei prints even a 33-year high.
- The US Treasury had to pay a higher yield in order to get its auction allocated in the market on Monday evening. The yield came out at 3.791%, while 3.776% was expected.
- The CME Group FedWatch Tool shows that markets are pricing in a 27% chance of rate hike for June and an 87% chance for a hike in July. A few market participants still believe that should US CPI surprise to the upside, the Fed could still go for a 25bp hike on Wednesday.
- The benchmark 10-year US Treasury bond yield trades at 3.73%. Steady for now after the whipsaw move on Monday with the 10-year Treasury yield moving from 3.72% to 3.8% before closing at 3.74%.
US Dollar Index technical analysis: USD to move substantially
The US Dollar is showing further signs of weakening as almost every currency in the Dollar Index (DXY) is gaining traction against the Greenback. That floor at 103 really comes close now and could see a firm break on the back of the US CPI numbers later this Tuesday.
On the upside, 105.44 (200-day SMA) still acts as a long-term price target to hit, as the next upside key level for the US Dollar Index is at 105.00 (psychological, static level), and acts as an intermediary element to cross the open space.
On the downside, 103.02 (100-day SMA) aligns as the first support level to confirm a change of trend. In the case that breaks down, watch how the DXY reacts at the 55-day SMA at 102.55 in order to assess any further downturn or upturn.
How is US Dollar correlated with US stock markets?
Stock markets in the US are likely to turn bearish if the Federal Reserve goes into a tightening cycle to battle rising inflation. Higher interest rates will ramp up the cost of borrowing and weigh on business investment. In that scenario, investors are likely to refrain from taking on high-risk, high-return positions. As a result of risk aversion and tight monetary policy, the US Dollar Index (DXY) should rise while the broad S&P 500 Index declines, revealing an inverse correlation.
During times of monetary loosening via lower interest rates and quantitative easing to ramp up economic activity, investors are likely to bet on assets that are expected to deliver higher returns, such as shares of technology companies. The Nasdaq Composite is a technology-heavy index and it is expected to outperform other major equity indexes in such a period. On the other hand, the US Dollar Index should turn bearish due to the rising money supply and the weakening safe-haven demand.
