The US Dollar has dipped once again following the release of December’s Producer Price Index (PPI). Market participants are apprehensive, especially with the looming prospect of comments from President-elect Donald Trump on the recent developments. The US Dollar Index (DXY), which monitors the dollar’s performance against a basket of six major currencies, has slipped below 110.00, now seeking a foothold to rebound.
The US Dollar Index’s latest move downward is largely attributable to a softer-than-anticipated PPI report for December. On top of this, remarks from members of Donald Trump’s incoming administration have suggested a gradual introduction of tariffs to prevent a surge in inflation, according to Bloomberg. Such comments, coupled with the anticipation of Trump’s own remarks, have traders on high alert.
The US economic agenda ramps up on Tuesday, spotlighting the PPI as a precursor to Wednesday’s more significant Consumer Price Index (CPI). Every figure in the latest PPI report, both headline and core for monthly and annual figures, came in below expectations. This could somewhat lower forecasts for the CPI figures due out midweek.
Daily Digest Market Movers: Not That Hot
December’s PPI figures failed to meet expectations:
- The core PPI rose by 0.0% month-on-month, missing the 0.3% target and falling short of November’s 0.2%.
- The headline PPI ticked up 0.2%, below both the 0.3% forecast and the 0.4% mark from the month before.
- Annually, headline PPI climbed 3.3%, shy of the projected 3.4%, yet higher than November’s 3.0%. Core PPI surged to 3.5%, under the expected 3.8%, yet up from last month’s 3.4%.
At 15:00 GMT, Kansas City Fed President Jeff Schmid will speak on the US economic and monetary policy outlook at a Central Exchange event. Later, at 20:05 GMT, John Williams, the New York Fed President, will give opening comments at an event focused on housing affordability organized by the New York Fed in New York City.
European stocks and US futures have shown a positive reaction to the softer-than-expected PPI reading, with significant indices trending upward. The CME FedWatch Tool suggests a hefty 97.3% likelihood that interest rates will remain as they are during January’s meeting. The Federal Reserve (Fed) is expected to continue a data-dependent strategy, especially with uncertain inflation factors as Trump prepares to assume office on January 20.
US Treasury yields are also seeing a notable decline. As of Tuesday, the 10-year benchmark is hovering around 4.781% after reaching a new 14-month high of 4.802% on Monday.
US Dollar Index Technical Analysis: Keep an Eye on Those Comments
Investors should brace for increased volatility with the US Dollar Index (DXY). The frequency of announcements from President-elect Trump and his team is expected to cause several sharp reactions in the market, making the direction of movement somewhat unpredictable.
Resistance is firmly pegged at the psychological threshold of 110.00. Beyond that, the next significant level is 110.79, with 113.91—the double top from October 2022—being the subsequent target.
Looking downward, the green ascending trend line from December 2023, seen around 109.00, serves as primary support. If the index slips further, 107.35 is its next safety net. Additional support sits near 106.52, reinforced by the 55-day Simple Moving Average at 106.92, which could halt downward pressure.
Fed FAQs
The Federal Reserve shapes monetary policy in the US, focusing on price stability and full employment. They primarily adjust interest rates to achieve these objectives. In periods of rapid inflation, the Fed raises rates to curb borrowing, strengthening the US Dollar as it attracts foreign investment. Conversely, if inflation drops below 2% or unemployment rises sharply, the Fed might lower rates to spur economic activity, which can weaken the dollar.
The Fed conducts eight policy meetings annually, with the Federal Open Market Committee (FOMC) evaluating economic conditions. The FOMC includes twelve officials: the seven Board of Governors members, the New York Fed President, and four rotating Reserve Bank presidents.
In challenging times, the Fed might resort to Quantitative Easing (QE), a non-standard policy maneuvering financial systems by buying substantial amounts of bonds to inject liquidity, often weakening the Dollar. Quantitative Tightening (QT), the reverse of QE, strengthens the Dollar by tapering these bond purchases and non-reinvestment in maturing bonds.
