- US Housing Starts and Building Permits from February beat expectations.
- All eyes are now on the Fed’s updated Dot Plot on Wednesday, an interest rate pause is already priced in.
- US Treasuries are edging downward but remain at multi-week highs.
The US Dollar Index (DXY) is fluctuating around 104.00, registering gains ahead of the impending Federal Open Market Committee (FOMC) meeting on Wednesday. This marks the highest level since March 1. Markets await fresh guidance, and if the Federal Reserve’s (Fed) updated Dot Plot or Chair Jerome Powell provides any dovish signals, the USD may resume its downside action.
In the meantime, Fed officials remain cautious about rushing too soon to start cutting as inflation remains sticky, which seems to also provide a cushion to the USD. The fresh guidance from Wednesday and incoming data will continue dictating the pace of the Greenback for the short term.
Daily digest market movers: DXY extends gains on strong housing data ahead of Fed decision
- Housing Starts in February reported by the US Census Bureau demonstrated a 10.7% MoM increase, rebounding from a -12.3% reading in the previous report.
- Building Permits (Feb) came in at 1.521M, higher than the 1.425M expected.
- The market currently anticipates the Fed remaining on its hawkish path, factoring in a 10% likelihood of a rate cut in May and a 65% chance in June. However, those odds may change after Wednesday’s FOMC decision.
- The 2-year yield is currently trading at 4.70%, while the 5-year yield stands at 4.31% and the 10-year yield at 4.30%.
DXY technical analysis: DXY sees bullish momentum dominate market
The technical indicators on the daily chart reflect a positive bias. The Relative Strength Index (RSI), bearing a positive slope in positive territory, signals an augmenting bullish strength. Simultaneously, the histogram of the Moving Average Convergence Divergence (MACD) is showcasing rising green bars, further affirming the dominance of buying momentum.
The Simple Moving Averages (SMAs) further bolster this bullish outlook. The DXY is now positioned above the convergence of 20,100 and 200-day Simple Moving Averages (SMAs) near the 103.50-70 area, which suggests that bulls are controlling the broader outlook.
Considering these signals, a snapshot of the current technical outlook implies that overall, bulls are gaining ground. However, bulls must build strong support above the mentioned SMAs to consolidate their movements.
Inflation FAQs
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%.
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.
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.
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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