US Dollar takes a beating in Monday's selloff with Yuan and Yen as biggest winners

The US Dollar is wounded on Monday as the Greenback sinks in every major pair.
No focal data points on Monday, which means no catalysts for a turnaround.
The US Dollar Index falls off its pedestal, finding support momentarily at 104.50.

The US Dollar (USD) pulls back firmly on Monday on the back of a surprise intervention from the People’s Bank of China (PBoC). The PBoC held a meeting in Beijing on FX markets and confirmed that it will prevent any “over-adjustment” risk in the Yuan. It fixed its Yuan at 7.2148 USD/CNY where 7.3391 USD/CNY was expected.

Although it will be a very calm Monday in terms of the calendar and no US Federal Reserve speakers scheduled, keep an eye on the US bond market. This Monday three different tenures are set to be auctioned. With plenty of supply to be issued in the markets, US yields might rise again. Remember that bonds are quoted in prices, while yields move inversely to that price. With more supply issued in the markets, prices can drop and yields rise, supporting a stronger US Dollar.

Daily digest: US Dollar sinks

In a sidemeeting at the G20 India and Saudi Arabia discussed settling trades in local currencies, away from the US Dollar.
Plenty of rumours in the FX markets abound on Monday on the possibility for the Japanese Central Bank (BoJ) to loosen its Yield Curve Control (YCC), which would see its bond yields soaring higher.
The G20 meeting has not brought any significant headlines or breakthroughs, as most news outlets are focusing on the absence of Russia and China as a telling sign.
The People's Bank of China (PBoC) has issued again a strong peg for its Yuan against the US Dollar. Additionally, it held a meeting in Beijing to outline an FX strategy in order to avoid speculation on a weakening Yuan. The comments spooked speculators and saw the Yuan strengthening near 1% against the US Dollar.
In the fallout of those earlier PBoC comments, meeting and fixing, the Greenback lost over 1% as well against the Australian Dollar (AUD/USD) and the Japanese Yen (USD/JPY).
Equities are looking for direction with no real notable outliers to mention. The only element to mention are the US Nasdaq futures, which are up over 50% in pre-trading.
The CME Group FedWatch Tool shows that markets are pricing in a 93% chance that the Federal Reserve will keep interest rates unchanged at its meeting in September.
The benchmark 10-year US Treasury bond yield trades at 4.28% and is steeping again. The same story looks to continue this week with the US Treasury issuing a lot more debt, which causes prices to drop and yields to soar.

US Dollar Index technical analysis: technical pullback

The Greenback is taking a firm step back after falling over 1% against the Yuan, Yen and Australian Dollar. The overall cross for the Greenback is blood red for all its G20 major peers. Nonetheless, the sell-off in the US Dollar Index is notable but remains contained and might ease once the US session opens this week.

The new high to watch is at 105.16, both the high from last Thursday and the six-month high. The US Dollar Index first needs to gain back its lost territory from this Monday and break above the peak of Thursday mentioned here before. From there, the next high is at 105.88, the high of 2023.

On the downside, the 104.50 level already gave way support with traders now watching 104.44. That is the high of August 25th and should act as a pivotal level. Once that gives way, a substantial downturn could take place to 103.03, where the 200-day SMA comes into play for support.

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.

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