US Dollar decline as markets await drivers, FOMC minutes on the watch

The DXY index shows weakness as the US returns from holiday, trading modestly lower.
No relevant reports were released during the session, while markets await fresh catalysts.
All eyes are now on FOMC minutes from January’s Federal Reserve meeting on Wednesday.

Patricio Martín FXStreet

The US Dollar (USD), as measured by the DXY index, is trading modestly lower at 104.05 with no relevant highlights seen during the European and American sessions.

Despite a post-holiday dip, the US Dollar's stance remains firm amidst a resilient US economy and a seemingly unshakeable Federal Reserve (Fed), whose reluctance to resort to monetary easing may eventually limit the Greenback’s losses.

Daily digest market movers: The US Dollar trades mildly lower ahead of FOMC minutes

Markets await fresh drivers to continue timing the start of the Fed’s easing cycle. FOMC’s January Meeting Minutes are due on Wednesday.
Market anticipation is also brewing for upcoming speeches from Federal Reserve members Bowman (Wednesday) and Kashkari (Thursday) to gather additional insights.
According to the CME FedWatch Tool, the odds of a Fed cut have significantly declined for the March and May meeting as markets push the projected start of easing to June.

Technical analysis: DXY gives up 100-day SMA, more downside may be on the horizon

The daily chart indicators reflect the somewhat conflicted picture of the current technical landscape. Despite the Relative Strength Index (RSI) sitting in positive territory, its negative slope signals a weakening of bullish momentum, hinting at potential downside risks. Simultaneously, the green bars in the Moving Average Convergence Divergence (MACD) histogram are decreasing, indicating a slowdown in buying pressure and a potential shift in sentiment.

Furthermore, although the pair is trading above the 20 and 200-day Simple Moving Averages (SMAs), which suggests a traditionally bullish stance, the struggle of the bulls to effectively consolidate above the 100-day average puts the strength of the uptrend in doubt.

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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