US Dollar Index (DXY) flatlines near 101.70; awaits US CPI report amid Iran uncertainty

DXY stalls the overnight fall and draws support from a combination of factors.
Mixed signals over US-Iran peace talks keep geopolitical risk premium in play.
Fed hike bets further act as a tailwind for the USD ahead of the US CPI report.

Haresh Menghani FXStreet

The US Dollar Index (DXY), which tracks the Greenback against a basket of currencies, consolidates around the 101.70 region during the Asian session on Tuesday, awaiting further developments surrounding the Middle East crisis and the US consumer inflation figures.

US President Donald Trump said that there is positive momentum towards ending the war on Iran, and that a resumption of strikes is quite unlikely, declaring the conflict effectively over. However, Mohsen Rezaei, Secretary of Iran’s Supreme National Security Council, dismissed reports of active negotiations as fake news and reiterated that Washington must accept Tehran's seven conditions to end the conflict. This keeps the geopolitical risk premium in play and supports the safe-haven US Dollar (USD).

Furthermore, the upbeat US Nonfarm Payrolls (NFP) report, released last Friday, reaffirmed market bets for an imminent rate hike by the US Federal Reserve (Fed). According to the CME Group's FedWatch Tool, traders are now pricing in over an 80% chance that the US central bank will raise borrowing costs again in December. This turns out to be another factor acting as a tailwind for the DXY, though bulls opt to wait for the release of the US Consumer Price Index (CPI) report before placing fresh bets.

The crucial inflation data will be looked at for more cues about the Fed's policy path. Apart from this, the incoming geopolitical headlines will play a key role in influencing the near-term USD price dynamics and provide some meaningful impetus to the DXY. In the meantime, the aforementioned fundamental backdrop warrants some caution for bearish traders and positioning for any further depreciating move.

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

Haresh Menghani

FXStreet

Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.

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