US Dollar heading into a volatile week as traders face US inflation data and Fed rate decision

  • US Dollar flirts with a green print after a subued performance during ASIA PAC and European session on Monday. 
  • Traders are making their homework this Monday in preparance of several important US economic data points and the Fed Interest Rate Decision on the agenda later this week. 
  • US Dollar Index heads back to 103.50 and will be data dependent on its path forward for this week.

The US Dollar (USD) almost pairs back all of its incurred losses at the start of the US trading session, as traders brace for a slew of events and macroeconomic numbers planned later this week. Important datapoints to have in mind for this week are the US Consumer Price Index (CPI) numbers on Tuesday, Industrial Production on Thursday and the Michigan Consumer Sentiment survey on Friday. The main stage is reserved for Wednesday with US Federal Reserve (Fed) issuing its June interest rate decision, including the press conference from Fed chairman Jerome Powell and new dot plot projections for the coming period. 

The Dollar Index (DXY) is trailing back higher after a depressed start of this trading week where the Greenback slid lower against most peers and nearly touched 1.08 in EURUSD. The DXY briefly broke below 103.25, and is now heading back to 103.50 as the US opening bell is seeing some demand for the US Dollar coming back online. Expect to see a sharp pickup in volatility his week versus last week as each economic datapoint will either confirm or contradict the view on the market where the US Dollar should be, and the DXY bound to see volatility pick up as this week gets underway. 

Daily digest: US Dollar one step at a time

  • The option market sees prices for at-the-money currency options in most G7 crosses against the US Dollar bottoming out after reaching over a 52-week low on vol prices. This could point to a pickup in vol prices, which points to a possible stronger USD. 
  • US bond traders will be able to assess risk appetite as the US Treasury will be issuing a 3Y and a 10Y bond issuance of US Treasury notes. 
  • As the US opening bell nears, US bond prices are jumping higher, making yields sink and are pulling down the whole US yield curve to session's low. 
  • Former Fed vice chair Richard Clarida came out with comments that it may be more difficult to to get inflation near 2% than in the past 15 years. 
  • PIMCO's CIO mentioned that PIMCO holds a bias of a weaker U.S. Dollar in the next few years. US core bonds look attractive in terms of yield at current levels. 
  • A tradedispute is developing after US expands its ban on imports from Xinjiang. China vows to protect China firms against any US sanctions. 
  • No comments expected in the run-up to the Fed Interest Rate Decision on Wednesday as the Fed speakers are in their blackout period. 
  • Sentiment during the Asian session showed some mild appetite for risk, with Japan Topix Index up 0.65% at its closing bell. European indices are taking over the positive tone with the German DAX up 0.70% near the European closing bell. 
  • US equity futures are in the green the first day of the trading week. All indices are positive with Nasdaq leading the charge at +0.50%, and S&P500 printing a new 52 week high.
  • The CME Group FedWatch Tool shows that markets are pricing in a 30% chance of rate hike for June and an 85% chance for a hike in July. The pause this week could trigger some further easing in the DXY. 
  • The benchmark 10-year US Treasury bond yield trades at 3.70%. A touch lower since the US Initial Jobless Claims showed an uptick, coming out at 261,000 against 233,000 previous. The numbers account for the second highest print for this year. 

US Dollar Index technical analysis: USD bears already nearing their end?

The US Dollar Index (DXY) has been on a tear the past two weeks and nearly touched 105.00 to the upside at the end of May. Since then, the DXY has refrained from making new highs and is showing a bearish patterns with lower highs and lower lows. Support in the form of the 100-day SImple Moving Average (SMA), near 103.00, is expected to be tested soon for support 

On the upside, 105.47 (200-day SMA) still acts as long-term price target to hit, as the next upside key level for the US Dollar Index is at 105.00 (psychological, static level), and acts as an intermediary element to cross the open space.

On the downside, 103.00 (100-day SMA) aligns as the first support level to confirm a change of trend. In the case that breaks down, watch how the DXY reacts at the 55-day SMA at 102.53 in order to assess any further downturn or upturn. 

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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