US Dollar sees a mild dip after CPI revisions
- The DXY stands at 104.15 on Friday with mild losses.
- US December’s inflation figures were downwardly revised by the BLS.
- Next week January’s CPI is due.
The US Dollar (USD) stood flat on Friday, with mild losses, closing a winning week but trimming most of its gains. All eyes are on next week’s US inflation data.
The US Dollar gathered significant ground in the first days of February after Jerome Powell, the Chair of the US Federal Reserve (Fed), mentioned that a reduction in interest rates in March seemed improbable. He emphasized the necessity for further proof of declining inflation before the Fed could feel confident about lowering rates, so incoming data will be key. Next week, the US will release Consumer Price Index (CPI) figures from January, which will likely set the pace of the Greenback for the short term.
Daily digest market movers: US Dollar loses some ground on soft CPI revisions
- The US Bureau of Labor Statistics (BLS) updated the Consumer Price Index (CPI) figures with new seasonal adjustments, lowering December's inflation rate to 0.2% from the initial 0.3%.
- The Core CPI for December remained steady at 0.3%, with no revisions made.
- November's CPI was adjusted upwards to a 0.2% increase from the previously reported 0.1%, while October's 0.1% rise was unchanged.
- According to the CME FedWatch Tool, the odds of a cut in March are low at around 20% but may see some changes in case the US CPI from January comes in lower than expected.
Technical analysis: DXY bulls struggle, continue battling with 100-day SMA
On the daily chart, the Relative Strength Index (RSI) is flat, situated in positive territory, which generally suggests a stall in buying momentum but still maintains a generally bullish tilt. Coupled with the Moving Average Convergence Divergence (MACD), which shows flat green bars, it confirms the trend of bullish momentum yet hints at a possible consolidation or minor pullback.
On a wider horizon, Simple Moving Averages (SMAs) provide a mixed picture. The index is trading above the 20-day SMA, a clear signal of short-term bullish strength. However, it remains below the 100-day SMA, indicating that the medium-term selling pressure persists. Interestingly, it holds above the 200-day SMA, underscoring a strong bullish presence in the long run.
This confluence of factors paints a picture of bulls struggling to gain substantial ground, which leaves the index vulnerable for further downside if the bulls don't wake up.
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.
Author
Patricio Martín
FXStreet
Patricio is an economist from Argentina passionate about global finance and understanding the daily movements of the markets.
