The U.S. dollar started the week peacefully with a slight gain as U.S. traders enjoyed Martin Luther King Jr.’s holiday. The currency traded at around 102.60 in the DXY Index on Monday.
In technical analysis, the U.S. Dollar (DXY) is showing signs of gaining traction. The positive Relative Strength Index (RSI) slope and stable Moving Average Convergence Divergence (MACD) suggest short-term bullish momentum despite the index being below the 100 and 200-day Simple Moving Averages (SMAs) and lingering bearish undertones.
This week is predicted to lack notable highlights, with markets still analyzing last week’s U.S. inflation readings for December.
CPI impact on USD
The greenback’s gain was backed by the recent release of the Consumer Price Index (CPI) for December. The U.S. Bureau of Labor Statistics recently revealed a 3.4 percent Year-over-Year (YoY) increase in the CPI, surpassing both November’s 3.1 percent and the expected 3.2 percent.
A surge in the CPI indicates a rise in the cost of living, affecting consumers’ purchasing power and the overall economy. It can prompt the Federal Reserve to make adjustments in interest rates as part of its monetary policy to manage inflation.
The market also experienced a decrease in the core CPI to 3.9 percent, which is lower than November’s four percent but higher than the anticipated 3.8 percent. Even so, the market’s performance remained resilient. The higher-than-expected CPI also contributed to the USD gaining momentum.
Meanwhile, the U.S. Producer Price Index (PPI) for final demand saw a one percent yearly rise in December, slightly below the 1.3 percent market forecast but up from the revised 0.8 percent in November.
The annual core PPI, excluding volatile items, rose by 1.8 percent, falling below November and analysts’ estimates of two percent and 1.9 percent, respectively. The monthly core PPI remained steady for the third consecutive month.
Despite higher CPI figures, market sentiment leans towards the expectation of an earlier easing cycle by the Fed. The CME FedWatch Tool indicates elevated odds of rate cuts in March and May at 70 percent and 66 percent, respectively.
Fed’s Beige Book this week
Further influencing market expectations are the plans for December’s retail sales figures and the Beige Book, which are set to be released this week.
The retail sales figures for December will offer valuable insights into consumer spending during the holiday season, which is a crucial period for retailers. The U.S. typically sees a substantial portion of its annual retail sales during this season.
The National Retail Federation (NRF) predicts a three to four percent increase in holiday retail sales from November 1 to December 31, 2023, compared to 2022.
Close attention will also be paid to the upcoming Beige Book release and Retail Sales figures. The two are expected to influence market sentiment and shape expectations regarding the nation’s economy and potential future Fed policy actions.
The Beige Book, published by the Fed, contains a summary of economic conditions in its 12 districts. The latest report disclosed a U.S. economic slowdown, with consumers cutting back on discretionary spending and becoming more price-sensitive.
The previous Beige Book also highlighted a decrease in consumer spending and manufacturing activity, coupled with a slight increase in employment and inflation.