US Dollar defends its ground ahead of CPI data

US Dollar is rising ahead of the presidential debate, continuing its strength despite ongoing dovish Fed easing expectations.
Outcome of tonight's debate between Vice President Harris and former President Trump might shake the USD’s ground.
Dovish bets on the Fed might limit the USD’s upside.

Patricio Martín FXStreet

The US Dollar Index, a measure of the USD’s value against six other currencies, is firm ahead of tonight’s presidential debate. Markets are likely to react to the debate outcome, with analysts expecting volatility in currency markets depending on the perceived winner. Market focus is set on Wednesday’s Consumer Price Index (CPI) inflation figures.

Despite positive economic indicators, the market may be exaggerating its expectations for aggressive monetary policy easing. The current growth rate exceeds the long-term trend, signaling that markets may be overestimating the need for such measures. However, a 25 bps cut would seem to be a done deal.

Daily digest market movers: US Dollar firm on quiet Tuesday ahead of CPI figures despite steady dovish bets

US Dollar continues to rise despite expectations of continued easing by the Fed.
Traders are currently pricing in nearly 125 bps of easing by year-end, suggesting 50 bps cuts at the November and December meetings.
Market also sees 225 bps of easing over the next 12 months.
US presidential debate will be held Tuesday night and could provide more insights on how financial markets would perform under a Trump or Harris presidency.
Perceived debate winner might set the pace of the Greenback’s dynamics. In addition, CPI figures on Wednesday will also be important.

DXY technical outlook: DXY sentiment slightly improves, indicator shift suggests momentum uptrend

Technical analysis for the DXY indicates a slight improvement in sentiment. Indicators, including the Relative Strength Index (RSI) and the Moving Average Convergence Divergence (MACD), are still in negative territory but recovering, suggesting a potential shift in momentum. The DXY index recently reclaimed the 20-day Simple Moving Average (SMA) near 101.60, providing support to the short-term outlook.

To maintain this uptrend, buyers must continue to hold above this level. Key support levels to watch include 101.60, 101.30 and 101.00, while resistance levels lie at 101.80, 102.00 and 102.30.

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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