DXY index trades sideways as Fed policy in focus

DXY index stable, ends week with growth after Powell comments

The DXY dollar index was stable on Friday following remarks from Federal Reserve Chair Jerome Powell, indicating the potential for further rate hikes if inflation persists above the central bank's 2% target.

The Japanese yen weakened as traders remained attentive to the possibility of intervention to support the struggling currency.

Powell, along with other Fed officials, expressed uncertainty on Thursday about whether US interest rates are sufficiently high to combat inflation, saying:

“The Federal Open Market Committee is committed to achieving a stance of monetary policy that is sufficiently restrictive to bring inflation down to 2 percent over time; we are not confident that we have achieved such a stance. If it becomes appropriate to tighten policy further, we will not hesitate to do so.”

The official suggested that improvements in the supply of goods, services, and labor could provide additional assistance in controlling price increases.

The dollar saw a brief increase on Friday after data revealed a decline in consumer sentiment in November, coupled with a rise in inflation expectations. The dollar index showed little change, standing at 105.92.

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Consumer price inflation: Key U.S. CPI reading to be released next week

Upcoming major U.S. economic releases include consumer price inflation and retail sales data scheduled for the following week. The dollar faced a decline last week, particularly after Powell's perceived dovish tone post the Fed's two-day meeting. Weaker-than-expected jobs data on Friday further fueled the belief that the Fed has concluded its interest rate hikes.

Fed funds futures traders are currently pricing in an 18% likelihood of an additional interest rate hike by January, down from 28% a week ago, according to the CME Group’s FedWatch Tool.

In his week-ahead preview on Friday, Markets.com Chief Market Analyst Neil Wilson covered the upcoming U.S. inflation figures, as well as their potential impact on the Fed’s monetary policy:

“All eyes fall on the US CPI inflation report. Core inflation ticked higher in September – a worrying sign for the Fed and equity bulls that more interest rate rises may be required. The headline CPI index rose 0.4% on the month and 3.7% from a year ago, which was above forecasts for 0.3% and 3.6%. Core CPI increased 0.3% on the month and 4.1% on a 12-month basis, in line with expectations. Sticky inflation could see the Fed raise rates again should it not start to come down enough.”

The dollar also saw a spike on Thursday in tandem with Treasury yields, following weak demand for a $24 billion 30-year bond auction by the U.S. Treasury Department. The impact of a ransomware attack on the U.S. arm of the Industrial and Commercial Bank of China (ICBC) on demand for the debt in the U.S. Treasury market remains unclear.

USD forecast: Scotiabank says DXY index “stalling” from 106 mark

In a dollar forecast issued on Friday, Scotiabank’s Chief FX Strategist Shaun Osborne wrote that rising Treasury yields would not necessarily support the USD going forward:

“Rising yields which reflect rising risks for holding US Treasury debt rather than the underlying strength of US economic data are not necessarily going to support the USD moving forward.

The squeeze higher in the DXY averted rising technical pressure for more losses below support in the mid-105 area and gains appear to be stalling, if not reversing from 106.

There is still some underlying softness evident in the broader USD performance but trends may steady ahead of next week’s key (CPI, Retail Sales) data.”

At the time of writing on Friday, the U.S. dollar index was trading at 105.96, up 0.05% on the day, as per MarketWatch data. The euro to dollar rate hovered around the $1.067 area, while the pound weakened against USD to trade around $1.2206.

The dollar to yen exchange rate saw the Japanese currency retreat against the greenback, with USDJPY trading at 151.54.

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Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.