- The US-China deal fails to provide any significant support to the US Dollar.
- The lack of details about the agreement has triggered some scepticism among the investors.
- Markets are increasingly cautious ahead of the US CPI release and a 10-Year US Bond auction.
The Dollar featured a tepid reaction to the trade deal between the US and China. Price action has remained limited within the last four days’ trading range, with upside attempts failing to find follow-through above the 99.00 level.
The world’s two major economies seem to have agreed on a “framework” to ease restrictions on rare earths trade, allowing them to return to last month’s Geneva talks consensus. Details of the agreement, however, have been scarce, and left markets wondering about the durability of the deal.
Doubts about the deal are limiting Dollar’s upside attempts
Investors have come to terms with the idea that a deal is better than no deal, but their reaction has been far from enthusiastic. The Dollar appreciated during Wednesday’s Asian session, before trimming gains at the European session opening, with all eyes on the US CPI and an auction of US Treasuries.
Consumer inflation is expected to have accelerated in May, mainly driven by higher energy prices, but the Core CPI might start to show the impact of Trump’s tariffs. Markets are increasingly wary of an upside surprise in price pressures, which might revive stagflation fears and pose a serious challenge to the Fed.
Apart from that, a $39 billion auction of 10-year Treasury bonds will be closely watched to assess the impact of the US debt crisis on the bond market. A key point will be the interest from indirect bidders, which, in May, took 71% of the supply. A weak demand is likely to hurt the US Dollar.
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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