US Dollar orbits at elevated levels after the Fed spooks markets with a hawkish tilt for 2025
- The US Dollar retreats from its two-year high after the Fed signaled fewer interest-rate cuts ahead.
- The FOMC members have concerns on inflation throughout 2025 and factor in a Trump-effect.
- The US Dollar Index (DXY) is trading at 108.00, finding support at that level.
The US Dollar (USD) faces some pressure from profit taking on Thursday, with the DXY Index hovering around 108.00 all day now, after its sizable upward move on Wednesday on the back of the Federal Reserve (Fed) interest-rate decision. The rate cut by 25 basis points, lowering the policy rate to the 4.50%-4.75% range, was already long priced in. Markets got spooked by the retreat in the number of projected rate cuts for 2025 from four to only two.
It appears that members of the Federal Open Market Committee (FOMC) are concerned about the continuation of the disinflationary path. The recent commitments from President-elect Donald Trump are clearly alive in the minds of the Federal Reserve members. Prospects of fewer rate cuts in 2025 widen the rate differential even more between the US and other countries in favor of a stronger US Dollar.
The US economic calendar is further winding down towards the Christmas lull. The third reading of the US Gross Domestic Product for the third quarter did not bring much changes. Rather the Philadelphia Fed Manufacturing Survey for December saw a big drop and fell deeper into contraction.
Daily digest market movers: Manufacturing sector gets slaughtered
- A government shutdown is looming in the US. Both the House of Representatives and the Senate are rushing to pass a stopgap bill. Meanwhile, President-elect Donald Trump already said he opposed the bill, according to Fox News.
- A chunky batch of data got released this Thursday:
- Weekly Jobless Claims:
- Initial Jobless Claimscame in at 220,000 for the week ending December 6 from 242,000 the week before and below the 230,000 estimate.
- The third reading for the Gross Domestic Product for the third quarter:.
- The annualized GDP grew by 3.1%, beating the 2.8% estimate and previous reading, headline Personal Consumption Expenditures (PCE) Price Index unchanged at 1.5%, core PCE stable at 2.1%, and GDP Price index also unchanged at 1.9%.
- The Philadelphia Fed Manufacturing Survey for December came in as a big miss on estimates. A firm declineto -16.4, missing the 3 estimate and against the previous -5.5.
- Weekly Jobless Claims:
- At 16:00 GMT, the Kansas Fed Manufacturing Activity for December will be issued. The previous reading showed a contraction at -4.
- Equities in Europe are down over more than 1% for this Thurdsay while US equities are in the green and are brushing off the Fed's hawkish message.
- The CME FedWatch Tool for the first Fed meeting of 2025 on January 29 sees a 91.4% chance for a stable policy rate against a small 8.6% chance for a 25 basis points rate cut.
- The US 10-year benchmark rate trades at 4.56%, a fresh seven-month high.
US Dollar Index Technical Analysis: More to come
The US Dollar Index (DXY) appears to have played its last hand for 2024. After the Fed rate decision and the release of the dot plot, the DXY increased to a fresh two-year high at 108.28 to later suffer from profit taking. The expectation is that the DXY might correct further until 107.35 or even 106.52 before finding solid support.
A fresh set of levels need to be defined to the upside. The first up is 109.29, which was the peak of July 14 2022 and has a good track record as a pivotal level. Once that level is surpassed, the 110.00 round level comes into play.
Under the pressure of some profit taking, the DXY could now look for some solid support. The first downside barrier comes in at 107.35, which has now turned from resistance into support. The second level that might be able to halt any selling pressure comes in at 106.52. From there, even 105.53 could come under consideration while the 55-day Simple Moving Average (SMA) at 105.23 is making its way up to that level.
US Dollar Index: Daily Chart
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.