Market expectations of an increase in interest rates strengthened DXY

  • US annual PPI fell more quickly than anticipated in February.
  • In February, American retail sales dropped more than was predicted.
  • The US Dollar Index maintains its above-104.50 daily gains.
  • Market speculation that Fed will raise interest rates by 0.25% in March supported DXY.

DXY Fundamentals and News

DXY is trading at 104.74, up by 1.11% in the day. The US Dollar Index maintains robust daily gains as the market anticipates a Fed interest rate hike in March.

Fed rate hikes speculations aiding the DXY prices

According to market experts, the Federal Reserve (Fed) is unlikely to announce higher interest rates as US inflation has slowed, the unemployment rate has risen, and the US economy’s confidence has taken a blow following the tragic failure of Silicon Valley Bank (SVB).

The US CPI announcement on Tuesday triggered a rally in risk-sensitive assets as headline inflation fell to 6.0%, as expected. Analysis of the US inflation report revealed that although used car prices continued to drop, the cost of housing rose, placing tremendous pressure on households.

Moreover, after the release of the CPI report, Reuters reported that American inflation remained high in February and that concerns about a prolonged economic meltdown had eased. According to Reuters, the Federal Reserve may increase its benchmark rate by a quarter point next week and again in May.

It raised the likelihood that Fed chief Jerome Powell will hike interest rates slightly at his upcoming monetary policy meeting, scheduled for the next week. Investors hailed the period of dropping inflation. As a result, following the CPI news, the dollar strengthened, and the DXY soared on forecasts for potential rate hikes.

How did US macroeconomic data impact on DXY?

Meanwhile, according to the statistics released on Wednesday, the Producer Price Index (PPI) for final demand in the US decreased from 5.7% in January to 4.6% in February. This figure was much below the 5.4% market forecast.

The annual Core PPI decreased from 5.4% to 4.4% for the same period, below experts’ expectations of 5.2%. The Core PPI registered zero percent monthly. The PPI monitors inflation from the perspective of business and industry.

The PPI numbers dropped, indicating that manufacturers find it difficult to raise prices for products and services at factory gates due to reduced overall demand. It eventually reduces the total inflation rate and the demand for labor. However, DXY continued to rise despite negative PPI data on the day.

In the US, retail sales also decreased in February as sales of motor vehicles and other goods declined. It reversed the previous month’s outsized surge, although consumer spending remained strong.

In February, retail sales in the US fell by 0.4% on a monthly basis to $697.9 billion. After rising in January, US retail sales decreased in February, signalling that high inflation is beginning to put pressure on consumer spending, even though it is still holding steady.

The data did not directly impact the US Dollar’s performance against its key rival currencies. The US Dollar Index (DXY) was trading up on the day. It is because of the market speculation that the Fed would increase interest rates by 0.25 bps at its forthcoming meeting on March 22 to control inflation.

If you don’t risk anything, you risk even more.

Erica Jong