US dollar index creeps back as Powell rules out negative interest rates

US dollar index creeps back as Powell rules out negative interest rates
  • The US dollar index pared back earlier losses after Jerome Powell ruled out negative interest rates.
  • The market also reacted to the weak Producer Price Index (PPI), which came a day after the CPI data.
  • The Swedish krone and British pound were the biggest movers in the Dollar index.

The US dollar index (DXY) pared early losses as the market reacted to a speech by Jerome Powell and the disappointing Producer Price Index (PPI) data.

Dollar index rises
US dollar index rises after Powell speech

US dollar index reacts to the PPI data

The US dollar index rose slightly even after data from the Bureau of Labour Statistics (BLS) released weak PPI data. The number, which measures the price of goods sold by US manufacturers, declined by 1.3 per cent in April. This was the worst decline since the bureau started releasing it in 2009. Analysts polled by Bloomberg were expecting the PPI to decline by 0.5 per cent.

In the same month, the core PPI declined by 0.3 per cent, which was also worse the first time it has ever contracted. The core PPI number measures the change in price of the goods excluding the volatile food, energy, and services.

According to the bureau, the index of final demand declined by 3.3 per cent in April. This was the worst decline since the records started. This decline was mostly due to a sharp decrease in the prices of gasoline, which declined by 56.6 per cent. The fall in gasoline prices was partially offset by a 12.6 per cent increase in beef and veal prices. Further, the index for processed goods fell by 3.7 per cent, which was the largest decline since 2008. The bureau said:

“In April, over 80 percent of the decrease in the final demand index can be traced to a 3.3-percent drop in prices for final demand goods. The index for final demand services moved down 0.2 percent.”

The US dollar index is usually highly very sensitive to PPI numbers because they are usually a measure of inflation.

The PPI numbers came a day after the bureau released weak Consumer Price Index (CPI) data. These prices declined by 0.8 per cent in April while the core CPI fell by 0.8 per cent in the month.

Jerome Powell dismisses negative interest rates

The US dollar index also stabilised after Jerome Powell delivered a highly-anticipated speech to the Peterson Institute. In his written remarks, he warned the market that the US economy was facing a “deeper and longer recession.” He then said that the Fed will be ready to do more to help cushion the economy from this damage. He said:

“While the economic response has been both timely and appropriately large, it may not be the final chapter, given that the path ahead is both highly uncertain and subject to significant downside risks.”

He also said that negative rates were off the table. This was in response to a tweet by Donald Trump, who said that negative rates would be a good thing for the US. However, experts warn that such a scenario would not be good for the US economy because it would affect savers.

The biggest mover in the US dollar index was the British pound and Swedish krone, which rose by 20 basis points.

US dollar index technical outlook

US dollar index
US dollar index (DXY) technical forecast

The US dollar index rose to 100, from the intraday low of 99.56. On the four-hour chart, it has been moving within a channel with the support and resistance being at 98.65 and 100.84 since April. Also, the price is along the 38.6 per cent Fibonacci retracement level and above the 100-day EMA. Therefore, I expect the index to remain in this holding pattern ahead of the US jobless claims and retail sales data that will be released tomorrow and Friday respectively.

By Crispus Nyaga
Crispus Nyaga is a finance analyst and trader with more than 7 years industry experience. He's contributed to some of the leading financial brands in the world including Seeking Alpha, MarketWatch, Forbes, and Investing.com. Crispus has an excellent understanding of global macroeconomic and geopolitical issues, is a big fan of golf, and lives in Nairobi with his wife, son, and nephew.
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