Original article credit: Mitrade News
Title: US Dollar Weakens as Fed Comments and Inflation Data Shift Market Expectations
The US dollar ended the week retreating from its recent highs as traders digested the latest inflation figures and reassessed expectations around Federal Reserve policy. After touching a 10-month high earlier in the week, the dollar index (DXY) pulled back as economic data and central bank commentary caused markets to question the aggressiveness of further interest rate hikes.
Following strong gains throughout September and early October, driven by yield differentials and safe-haven demand, the US dollar finally saw some relief selling. Softer-than-expected inflation data and comments from Federal Reserve officials suggesting caution on further rate increases led investors to trim dollar-long positions.
Below is an in-depth breakdown of the recent dollar performance, key indicators, and how varying narratives are altering short- to medium-term market expectations.
US Dollar Falls from Multi-Month Highs
– The US Dollar Index (DXY) edged lower on Thursday, dropping 0.45% to around 105.68. This marked a decline from a recent 10-month high above 107, reached earlier in the week.
– Despite the dip, the DXY remains up approximately 2.5% over the past month as robust economic data in the US, along with rising Treasury yields, had previously supported dollar strength.
– The DXY pullback is primarily attributed to shifting Fed rhetoric and inflation readings that may signal a pause or near-peak in the Fed’s monetary tightening cycle.
Fed Commentary Suggests Policy Patience
– On Wednesday, Federal Reserve policymakers adopted a more cautious tone regarding future monetary policy tightening.
– Fed Governor Christopher Waller said the recent run-up in long-term bond yields could reduce the need for further rate increases. His comments suggested that tightening financial conditions may do the Fed’s job for it.
– Atlanta Fed President Raphael Bostic also said the current federal funds rate may be sufficient to bring inflation back to the 2% target over time, echoing the idea that the central bank might not need to do more.
– These statements contributed to a repricing in markets, with traders now expecting a more balanced or even dovish stance from the Fed going into 2024.
– As a result, implied Fed funds futures rates showed a reduced probability of another hike at the upcoming FOMC meeting in November.
CPI Report Sparks Reevaluation
– The latest US consumer price index (CPI) report was mixed but led to modest relief for investors.
– Headline inflation rose 0.4% in September, slightly above the 0.3% estimate, while the annual rate came in at 3.7%. Core CPI, which excludes food and energy prices, rose 0.3% on the month and 4.1% year-over-year.
– Market reaction was nuanced. The higher-than-expected CPI was not viewed as excessively hawkish because many price gains came from volatile shelter components.
– Some analysts interpreted the report as offering room for the Fed to pause while waiting for further data in the coming months.
– As a result, US Treasury yields fell slightly after the release, taking pressure off the dollar.
Treasury Market Impacts
– The yield on the US 10-year Treasury note briefly dipped below 4.6% in response to the dovish Fed remarks and CPI interpretation. This represented a modest drop from levels above 4.8% earlier in the week.
– Falling yields tend to weaken the US dollar, as reduced returns on dollar-denominated assets make them less attractive relative to global peers.
– The adjustment in yields implies that investors are beginning to believe that peak US interest rates may have already been reached, or are near at hand.
– Bond market trends remain crucial for USD direction, especially when macro data shows signs of stability or deceleration.
Risk Sentiment and Safe-Haven Flows
– Broad financial market sentiment improved during the latter part
Read more on EUR/USD trading.