- US Dollar lost ground on lower-than-anticipated Retail Sales figures, which fuel dovish bets on the Fed.
- Markets are digesting comments from Fed officials for placing their bets on the rate cut cycle.
- Investors continue challenging the Fed and bet on more than one cut in 2024.
On Tuesday, the US Dollar, as measured by the DXY Index (DXY), registered a decline, settling at 105.30. This downturn was mainly invoked by markets reacting to recent comments from Federal Reserve (Fed) officials in combination with the less than anticipated Retail Sales data for May.
The US economic outlook is riddled with mixed signals, but signs of disinflation are starting to arise, which may weaken the USD.
Daily digest market movers: DXY under pressure on disappointing Retail Sales figures
- Markets are now processing words from Fed speakers along with the just-released Retail Sales figures for May.
- On the data front, the US Census Bureau reported May's Retail Sales data growth at a slower pace of 0.1% against the projected 0.2%.
- A softening in Retail Sales growth could potentially affect the US Dollar by affirming investors' belief in the ongoing disinflation process.
- Regarding the Fed speakers, Cleveland Fed President Loretta Mester expressed her preference to observe a "longer run of good-looking inflation data" before any significant decisions are taken.
- Simultaneously, Neel Kashkari, President of the Minneapolis Fed, intimated that the Fed might wait until December for any further rate cuts, favoring the acquisition of more data before any actions are undertaken.
- Several other speakers will be on the wires on Tuesday, and their words might shake the USD.
DXY technical analysis: Momentum flattens, bulls running out of time
Technical indicators suggest a flattening momentum but still retain a positive stance. The Relative Strength Index (RSI) remains above the 50 level, while the Moving Average Convergence Divergence (MACD) continues to print green bars.
With the bullish activity taking a pause, the DXY Index continues to hold above its 20, 100 and 200-day Simple Moving Average (SMA). The slowing down of the momentum from last week might indicate a possible slowdown in the recent rally of the DXY.
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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