US Dollar softens slightly ahead of ECB interest-rate decision

The US Dollar eases on Thursday as the dust settles after the US CPI report, which showed inflation accelerated slightly as expected.
Traders shift their focus to Europe ahead of the European Central Bank’s last meeting of the year, with economists broadly expecting another rate cut.
The US Dollar Index (DXY) trades around 106.50, looking for direction.

The US Dollar (USD) softens slightly on Thursday, with the DXY US Dollar Index trading around 106.50, ahead of the last European Central Bank (ECB) meeting for 2024. All eyes will be on President Christine Lagarde as traders will want to see how the ECB will address the recent downturn in economic activity in the Eurozone. Although a 25 basis points interest-rate cut looks to be a near certainty, estimates for a 50 basis point rate cut and even no rate cut at all are on the table as well.

In the US, the economic calendar is rather light. The weekly Jobless Claims will probably soak up the latter part of the attention, whereas the Producer Price Index (PPI) report is not expected to create much waves. The most inflationary elements were already analyzed on Wednesday with the Consumer Price Index (CPI) report, and traders quickly positioned themselves to lock in a rate cut from the Fed next week. According to the CME FedWatch Tool, the chances of such a decision are currently at almost 99%.

Daily digest market movers: Focus shifts towards Eurozone

At 13:30 GMT, all US data for this Thursday will be released:
- Initial Jobless Claims for the week of December 6 will be released. Expectations are for claims to decline to 220,000 from 224,000 a week earlier.
- As for the Producer Price Index (PPI) data for November, the monthly headline PPI should increase at a stable pace of 0.2%, while the yearly figure is expected to tick up to 2.6% from 2.4%. The monthly core PPI should increase by 0.2%, slowing from the 0.3% increase seen the previous month. The yearly figure is anticipated to tick up to 3.2% from 3.1%.
Equities trade mixed, with the main European indices marginally in the green and US Futures are slightly subdued.
The CME FedWatch Tool is pricing in another 25 basis points (bps) rate cut by the Fed at the December 18 meeting by 98.6%, the highest probability seen yet after the US CPI release.
The US 10-year benchmark rate trades at 4.28%, a fresh high for this week.

US Dollar Index Technical Analysis: Push and pull

The US Dollar Index (DXY) is further defining a bandwidth that could hold until next year given the limited amount of data points left. The US Consumer Price Index (CPI) release did not really move the needle, with the DXY staying between 105.50 and 107.00.

The US Dollar bulls failed on Wednesday to close above 106.52 (April 16 high), a level that on previous occasions has also been a hard barrier to get through.. Next up is the 107.00 round level and 107.35 (October 3, 2023, high). Further up, the high of November 22 at 108.7 emerges.

Looking down, the pivotal level at 105.53 (April 11 high) comes into play before heading into the 104-region. Should the DXY fall all the way towards 104.00, the 200-day Simple Moving Average at 104.14 should catch any falling knife formation.

US Dollar Index: Daily Chart

ECB FAQs

What is the ECB and how does it influence the Euro?

The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy for the region. The ECB primary mandate is to maintain price stability, which means keeping inflation at around 2%. Its primary tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.

What is Quantitative Easing (QE) and how does it affect the Euro?

In extreme situations, the European Central Bank can enact a policy tool called Quantitative Easing. QE is the process by which the ECB prints Euros and uses them to buy assets – usually government or corporate bonds – from banks and other financial institutions. QE usually results in a weaker Euro. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The ECB used it during the Great Financial Crisis in 2009-11, in 2015 when inflation remained stubbornly low, as well as during the covid pandemic.

What is Quantitative tightening (QT) and how does it affect the Euro?

Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the European Central Bank (ECB) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the ECB stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Euro.