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US Dollar (DXY) Index News: Bearish Response to PCE Inflation Report

By:
James Hyerczyk
Published: Feb 29, 2024, 15:39 UTC

Key Points:

  • Dollar Index weakens post-PCE inflation data release.
  • PCE data crucial for Fed's monetary policy direction.
  • Market revises interest rate expectations, impacting dollar.
US Dollar Index (DXY)

Dollar’s Reaction to PCE Report

The U.S. dollar experienced varied movements after the release of January’s Personal Consumption Expenditures (PCE) inflation data. Initially weakening, the dollar later recovered some ground, reacting to inflation figures that aligned with economic analysts’ projections. Technically speaking, trader reaction to the 200-day moving average at 103.737 is likely to set the tone into the close.

At 15:23 GMT, the U.S. Dollar Index is trading 103.713, down 0.202 or -0.19%.

PCE’s Role in Fed’s Policy Direction

The PCE index, a critical measure for the Federal Reserve, showed a 0.3% rise over the month and a 2.4% increase on an annual basis. Excluding food and energy, the core PCE went up by 0.4% in the month and 2.8% year-over-year. These statistics, matching forecasts, are crucial for guiding the Fed’s monetary policy.

Interest Rate Outlook and Dollar Impact

The market’s expectations for interest rate reductions have shifted to later in the year, now focusing on June rather than March. This change is partly driven by recent remarks from Federal Reserve authorities, including New York Fed President John Williams, emphasizing the necessity for continuous monitoring of inflation rates before considering rate modifications.

Economic Indicators Affecting the Dollar

An unanticipated rise in personal income and a modest dip in spending also influenced the dollar’s movement. The gradual shift in consumer spending from goods to services signifies an ongoing economic readjustment following the pandemic. Moreover, international currency movements, notably the yen’s strength against the dollar in light of the Bank of Japan’s monetary policy statements, have also affected the dollar index.

Market Forecast: Neutral-to-Weaker View for U.S. Dollar Index

Given the PCE report’s confirmation of steady inflation and the Federal Reserve’s cautious approach to changing interest rates, a neutral-to-weaker view is projected for the U.S. Dollar Index in the short term.

While the consistent inflation data typically supports the dollar, the Fed’s reluctance to modify interest rates soon and the evolving global financial conditions introduce an element of unpredictability. This balanced forecast accounts for the interplay between ongoing inflation monitoring and potential delays in rate adjustments.

Investors are advised to keep a close watch on upcoming economic data and Fed announcements, as these will be critical in shaping the dollar’s path in the upcoming period.

Technical Analysis

Daily US Dollar Index (DXY)

The U.S. Dollar Index is weak on Thursday as bullish traders attempt to re-establish support on the 200-day moving average at 103.737. Trader reaction to this technical indicator is likely to set the tone into the close.

A sustained move over 103.737 will indicate the presence of buyers. This could trigger a late surge into 104.205.

A sustained move under 103.737 will signal the presence of sellers. Taking out the static support at 103.572 will indicate the selling is getting stronger with the 50-day moving average at 103.091 the next likely target.

About the Author

James is a Florida-based technical analyst, market researcher, educator and trader with 35+ years of experience. He is an expert in the area of patterns, price and time analysis as it applies to futures, Forex, and stocks.

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