US Dollar Slides to New Lows after Fed Cites CPI as Key to Hikes. Where to for USD?

US Dollar, DXY Index, Fed, FOMC, China, EUR/USD, GBP/USD – Talking Points

• The US Dollar softened today as Fed speakers put forward their case
• China re-opening might get a further boost from stimulus measures
• Risk and growth-linked assets are benefitting from the tilt. Will that sink USD?

The US Dollar remains vulnerable through Asia today, following on from the weakness seen in the US session that saw the US dollar index (DXY) make a seven-month low.

Overnight, Federal Reserve Bank of San Francisco President Mary Daly and her Atlanta equivalent, Raphael Bostic both pointed toward the Fed’s rate path potentially heading toward and above 5% by the middle of the year.

This is higher than what the futures and swaps markets are currently pricing in. The commentary also appeared to open the way for a 25 basis-point (bp) hike at the February Federal Open Market Committee (FOMC) meeting.

A crucial element emphasised in the debate between a 25 or 50 bp lift will be US CPI this Thursday, with a Bloomberg survey of economists anticipating 6.7% year-on-year to the end of 2023.

While the Fed continues to talk tough on slowing growth to fight inflation, the market seems to think that rate cuts could be coming later this year.

Elsewhere, it is being reported that Beijing is considering allowing local governments to take on more debt for infrastructure projects. Base metals have gained on the prospect of China resuming higher industrial production levels as the world’s second-largest economy re-opens.

China’s re-opening has aided risk assets in general with growth-linked currencies such as the Aussie, Kiwi and Loonie notching up sizable gains so far this week.

The DXY index is a US Dollar index that is weighted against EUR (57.6%), JPY (13.6%), GBP (11.9%), CAD (9.1%), SEK (4.2%) and CHF (3.6%).

Not surprisingly, the DXY index made its seven-month low at the same time that EUR/USD made a seven-month high yesterday. Sterling also appreciated notably as it made a 1-month peak against the Dollar. All other currencies in the index have outperformed the ‘big dollar’.

Ahead of Thursday’s US CPI data, Fed Chair Jerome Powel is due to speak later today (Tuesday) and his words will be probed for clues on his thoughts for monetary policy going forward.

DXY (USD) INDEX, EUR/USD, GBP/USD

Chart created in TradingView

— Written by Daniel McCarthy, Strategist for DailyFX.com

Please contact Daniel via @DanMcCathyFX on Twitter