US Dollar clears gains after dovish Fed's Goolsbee
- The DXY Index retreated towards 102.40.
- Headline and core CPI from December came in higher than expected.
- Investors are still confident that the Fed will cut in March.
- Fed's Goolsbee commented that 2023 was a "hall-of-fame" year for inflation reduction.
The US Dollar (USD) Index has climbed to 102.60 and then settled at 102.40 as financial markets continue to grapple with the release of a hot US Consumer Price Index (CPI) report from December, which came in higher than expected. Dovish bets eased somewhat, but markets are still betting on the Federal Reserve (Fed) easing cycle to begin in March.
The Fed's dovish stance, based on welcoming the cooling inflation and projecting no rate hikes in 2024, has recently weakened the USD and seems to be offsetting the resilience of the US economy while other economic blocks are weakening. Despite higher CPI numbers, the market remains stubborn and expects the Fed to initiate its easing cycle sooner rather than later. As long as this rhetoric predominates, the index's upward potential is limited.
Daily digest market movers: US Dollar climbs with hot CPI figures, dovish bets still high
- The US Bureau of Labor Statistics revealed that the Consumer Price Index (CPI) escalated to 3.4% YoY in December, surpassing November's 3.1% and the predicted 3.2% consensus figure.
- The core CPI dropped to 3.9%, lower than November’s 4%, but higher than the expected 3.8%.
- Yield rates for US bonds display mixed trends: 2-year bond yield at 4.33%, 5-year at 3.96%, and the 10-year bond yield is 4.01%.
- The CME FedWatch Tool reveals no rate hike predictions for the January meeting. Instead, March and May 2024 meeting expectations indicate increased probabilities for rate cut-offs despite hot inflation readings.
Technical Analysis: DXY index bulls make another stride as momentum gathers
Despite the index's location below both the 100 and 200-day Simple Moving Averages (SMAs), which suggests sustained pressure from the bears, the position of the index above the 20-day SMA is evidence that the bulls are gaining ground in this battle. This is clear from the uptick in buying momentum and indicates the potential for further short-term upside movements.
Secondly, the positive slope in the Relative Strength Index (RSI) corroborates this view. This signals that despite the recent bearish backdrop, buying momentum may be growing in strength, illustrating an increasing pressure from the bulls.
Lastly, the flat green bars on the Moving Average Convergence Divergence (MACD) provide further validation of this mixed sentiment. While the bars indicate a stillness in momentum, their green shade suggests a column of buying forces vying to tip the scale.
Taken altogether, the bulls appear to be gaining ground momentarily. However, the dominant bearish forces, given away by the positioning below the 100 and 200-day SMAs, must not be overlooked.
Support levels: 102.30, 102.00 (20-day SMA), 101.80.
Resistance levels: 102.70, 102.90, 103.00.
Canadian Dollar FAQs
What key factors drive the Canadian Dollar?
The key factors driving the Canadian Dollar (CAD) are the level of interest rates set by the Bank of Canada (BoC), the price of Oil, Canada’s largest export, the health of its economy, inflation and the Trade Balance, which is the difference between the value of Canada’s exports versus its imports. Other factors include market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – with risk-on being CAD-positive. As its largest trading partner, the health of the US economy is also a key factor influencing the Canadian Dollar.
How do the decisions of the Bank of Canada impact the Canadian Dollar?
The Bank of Canada (BoC) has a significant influence on the Canadian Dollar by setting the level of interest rates that banks can lend to one another. This influences the level of interest rates for everyone. The main goal of the BoC is to maintain inflation at 1-3% by adjusting interest rates up or down. Relatively higher interest rates tend to be positive for the CAD. The Bank of Canada can also use quantitative easing and tightening to influence credit conditions, with the former CAD-negative and the latter CAD-positive.
How does the price of Oil impact the Canadian Dollar?
The price of Oil is a key factor impacting the value of the Canadian Dollar. Petroleum is Canada’s biggest export, so Oil price tends to have an immediate impact on the CAD value. Generally, if Oil price rises CAD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Oil falls. Higher Oil prices also tend to result in a greater likelihood of a positive Trade Balance, which is also supportive of the CAD.
How does inflation data impact the value of the Canadian Dollar?
While inflation had always traditionally been thought of as a negative factor for a currency since it lowers the value of money, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Higher inflation tends to lead central banks to put up interest rates which attracts more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in Canada’s case is the Canadian Dollar.
How does economic data influence the value of the Canadian Dollar?
Macroeconomic data releases gauge the health of the economy and can have an impact on the Canadian Dollar. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the CAD. A strong economy is good for the Canadian Dollar. Not only does it attract more foreign investment but it may encourage the Bank of Canada to put up interest rates, leading to a stronger currency. If economic data is weak, however, the CAD is likely to fall.