US Dollar weakenes on falling yields after PCE data met expectations

The US Dollar Index plunged toward 106.00 on Wednesday.
The US Dollar ticked lower, but its losses may be limited as markets are pricing in a more hawkish Fed.
PCE data from October met expectations for inflation.

Patricio Martín FXStreet

In Wednesday’s session, the US Dollar Index (DXY), which measures the value of the USD against a basket of currencies, ticked 1% lower as markets assess the release of high-tier economic data including a Personal Consumption Expenditures (PCE) reading, the Federal Reserve’s (Fed) preferred gauge of inflation.

Daily digest market movers: US Dollar retreats despite sticky inflation data

Despite US data indicating rising inflation, the DXY remains on the back foot.
The market is pricing in a more hawkish stance from the Fed, which could lead to less cuts in the near term.
This hawkish stance is likely contributing to the recent strength of the US Dollar against other currencies.
Data is showing that the economy keeps doing well with no recession in view.
The Q3 Gross Domestic Product (GDP) was reported at 2.8% as expected.
Initial Jobless Claims improved to 213K, better than the expected 217K.
Durable Goods Orders rose by 0.2% in October, lower than the expected 0.5% but higher than September's -0.4%.
The PCE Price Index rose by 0.2% MoM and 2.3% YoY as expected. The core PCE annual figure increased by 2.8% YoY, meeting forecasts as well.

DXY technical outlook: Indicators suggest potential consolidation, but uptrend intact

The Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) indicators had been struggling to gain ground lately, and they seemed to have given up on Wednesday as the index retreats to 106.00.

This suggests that the index may be due for a period of consolidation. However, the index remains about its 20,100 and 200-day Simple Moving Averages (SMA), which indicates that the overall momentum remains positive. The DXY is expected to find support at 106.00-106.50 and faces resistance at 108.00.

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

Patricio Martín

FXStreet

Patricio is an economist from Argentina passionate about global finance and understanding the daily movements of the markets.

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