US Dollar stronger as Services PMI hold firm
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- The US Dollar advances against most pairs, except other safe-haven currencies.
- US PMI numbers see Services still strong at 54.1 which remains the issue for the Fed in order to get inflation under controle.
- The US Dollar Index is off its highs from 103, though still substantially up for the day.
The US Dollar (USD) is letting off some steam after a staggering performance earlier this Friday against several currencies as it benefited from substantial safe haven inflow. The risk-off tone came on the back of comments from US Treasury Secretary Janet Yellen, who said that recession remains a risk as long as the Federal Reserve (Fed) tightens its policy. Disappointing Purchase Manager Index (PMI) numbers out of France and Germany only poured more oil to the already burning fire and the current PMI numbers for the US are showing that the Fed can not let lose on its current hawkis stance as the the Services PMI remains elevated at 54.1. Services remains the biggest contributor for the sticky core inflation that the Fed needs to crack in order to bring inflation down to 2%.
For next week the focus will shift more toward the retail sector to determine where to take this US Dollar as on Tuesday Durable Goods Orders will come out at 12:30 GMT. The next day, on Wednesday, markets can get some more guidance from Fed Chairman Jerome Powell, a day before US Gross Domestic Product (GDP) is set to come out on Thursday. To close off next week in all beauty, the Personal Consumption Expenditure (PCE) Price Index is set to come out around 12:30 GMT.
Daily digest: US Dollar back into profit as US Services PMI persist
- The US Manufacturing PMI is painting a diar picture for that sector with another contraction to 46.3, coming from 48.4. This looks to be similar with the German numbers from across the Atlantic. US Services PMI heads lower from 54.9 to 54.1. Although a lower number, the decline is much lower than the rather big slide seen in Europe where French Services PMI is contracting and German Services PMI is substantially lower, though still above 50. This means that the Fed can and will need to be or stay more hawkish to get Services down, in order to get core inflation down, where the European numbers question if the European Central Bank (ECB) should hike at all as suddenly a recession is just around the corner.
- European PMI's point to further contractions in the eurozone as French Service contract from 52.5 to 48 and French Manufacturing PMI's 45.7 to 45.5. For Germany Services PMI went from 57.2 to 54.1 and the Manufacturing PMI's went from 44.8 to 43.6. This questions if the European Central Bank (ECB) will be that hawkish as it preluded to be in its latest interest rate decision. Markets paired back bets of more hikes to just only one in September, with a very slim chance of a second hike at December.
- US Housing data is done and dusted for this week. The main key takeaway is that the US housing market is holding up despite rapidly rising interest rates. There are even increasing signs of strength ahead, namely in the upbeat Building Permits data.
- St. Louis Fed President Jim Bullard spoke around 09:15 GMT, though his speech did hold any clues on the next steps for the monteray policy.
- Atlanta Fed President Raphael Bostic at 12:00 GMT said he favors no more rate hikes for the rest of the year. Tighening any further could lead to slower economy. Cleveland Fed President Loretta Mester closes off this week around 17:40 GMT in terms of Fed speakers.
- Western Texas Intermediate (WTI) Crude Oil sells off further, although Crude Inventories on Thursday showed a substantial drawdown. Most recent oil futures are priced at $68, below the important $70 psychological level and a one-month-low.
- Equities in Asia have closed firmly in the red with the Japanese Topix index retreating from its 33-year high and lost more than 1% on Friday. The Chinese Hang Seng Index edged down 1.70%. European indices are having trouble as well, though off the lows with the DAX still down 71%, earlier 1% and the FTSE 100 near -0.30%. US equity futures are off the low as well but are still large on the back foot with the Nasdaq futures performing a nosedive move of -1.20% just less than an hour before the US PMI numbers.
- The CME Group FedWatch Tool shows that markets are pricing in a 75.6% chance of a 25 basis points (bps) interest-rate hike on July 26th. The certainty of one more hike has increased as US Fed Chairman Powell remained hawkish in the recent two hearings, though markets remain reluctant to price in that second rate hike.
- The benchmark 10-year US Treasury bond yield trades at 3.73% and sees bond prices heading higher as investors park their money in rather safe places before the weekend.
US Dollar Index technical analysis: gains locked in
The US Dollar is delivering an upside surprise on Friday as it was on the back foot for most part of the week. Biggest moves to mention are USD/NOK up 2.16+% and USD/PLN around 1.06%, with aspecially that Norwegian Krone remarkable as the Norwegian Central Bank on Thursday had delivered a 50 basis point surprise hike and now is getting slaughtered against the Greenback. This fuels the US Dollar Index (DXY) in its breakout in the Asia-Pacific and European sessions.
On the upside, the 100-day Simple Moving Average (SMA) briefly touched at 103.07, triggering a short backfall intraday. Though the move is very bullish for the DXY, risk at hand could be a rejection against that 100-day SMA from a technical angle, with a pullback into the US session. In order to consolidate these gains, it would be good to see a close above the 100-day SMA in order to see the Greenback advance further next week.
On the downside, the 55-day SMA near 102.60 should flip again into support after being broken the past few weeks several times from both upside and downside moves. Still, the fact that this moving indicator has been chopped up so much might take away its importance a bit. Rather look for Thursday’s high at 102.46 to act as a floor, or 102.00 as psychological level.
Inflation FAQs
What is inflation?
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
What is the Consumer Price Index (CPI)?
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
What is the impact of inflation on foreign exchange?
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
How does inflation influence the price of Gold?
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it.
Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
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