US Dollar pulls back with bulls fleeing the scene after disinflationary print in CPI across the board

The US Dollar sinks after US CPI release.
sluggish Retail Sales and disinflationary CPI print add to the dollar outflow push
The US Dollar Index dips further into the lower 104.00 - levels

The US Dollar (USD) is fully retreating in the US Consumer Price Index (CPI) print price action mayhem. Nearly all measures have come off their previous levels and show that disinflation is back in play. A surge of Risk On is rolling through the markets with equities up, rates down and the Greenback seeing its bulls fleeing into Central European currencies.

Markets ignored these comments and likely focused solely on the revisions in the Producer Price Index (PPI) numbers, which were all to the downside. Additionally, news that the Chinese government is forming a rescue package to bail out its plagued real estate sector made headlines on Wednesday, seems to put much more pressure on the US Dollar Index (DXY).

On the economic front, all eyes will now be on the Federal Reserve (Fed) speakers. Federal Reserve Bank of Minneapolis President Neel Kashkari and Federal Reserve Governor Michelle Bowman might deliver some guidance on how to read the inflation release.

Daily digest market movers: Disinflation but a very steady pace

At 11:00 GMT, the Mortgage Bankers Association has released its Mortgage Applications index for the week ending May 10. The index increased by 2.6% the previous week and came in at 0.5% this week.
US CPI and the Retail Sales data for April have been released:
- April CPI numbers:
  - Monthly Headline CPI went from 0.4% to 0.3%.
  - Yearly Headline CPI went as expected from 3.5% to 3.4%.
  - Monthly core CPI went from 0.4% to 0.3%.
  - Yearly core CPI went from 3.8% to 3.6%.
- April Retail Sales:
  - Monthly Retail Sales went from 0.6% to 0%.
  - Retail Sales, excluding cars and transportation, went from 0.9% to 0.2%.
At 14:00 GMT, the National Association of Home Builders Housing Market Index for May will be released, and is expected to remain stable at 51.
Business Inventories for March are also to be released at 14:00 GMT and are expected to head to -0.1% from 0.4%.
Federal Reserve Bank of Minneapolis President Neel Kashkari will speak at 16:00 GMT. He is a non-voter for this year.
Federal Reserve Governor Michelle Bowman will take the stage around 19:20 GMT.
The Qatar World Economic Forum started on Tuesday morning. Headlines from world leaders may come out throughout the week.
Equities are jumping higher across the board and are rallying on the easing Greenback after the CPI release.
The CME Fedwatch Tool suggests a 91.3% probability that June will still see no change to the Federal Reserve's fed fund rate. Odds of a rate cut in July are also out of the cards, while for September the tool shows a 49.7% chance that rates will be 25 basis points lower than current levels.
The benchmark 10-year US Treasury Note trades around 4.36%,and adds to the weekly losses.

US Dollar Index Technical Analysis: Sure disinflation, though this will take ages

The US Dollar Index (DXY) further dipping below the important 105.00 level on Wednesday. Although disinflation might be back, markets were to eager to ignore the Fed and applaud any decline in CPI, even if it is just by the smallest marginal increment. At this pace a rate cut for 2024 looks to really be a close call, something that markets seem to forget.

On the upside, 105.52 (a pivotal level since April 11) must be recovered, ideally through a daily close above this level, before targeting the April 16 high at 106.52. Further up and above the 107.00 round level, the DXY index could meet resistance at 107.35, the October 3 high.

On the downside, the 55-day and the 200-day Simple Moving Averages (SMAs), currently at 104.69 and 104.34 respectively, have already provided ample support recently. If those levels are unable to hold, the 100-day SMA near 104.09 is the next best candidate.

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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