- Incoming data continues to influence easing cycle expectations with June as a potential start.
- Despite US CPI data intensifying, investor foresight accords more with frail labor market figures.
- Retail Sales and weekly Jobless Claims figures will dictate the pace of the USD for the rest of the week.
The US Dollar Index (DXY) exchanges hands at 102.80, recording mild losses. Despite hot figures from the latest Consumer Price Index (CPI) release, investors' expectations for the start of the Federal Reserve’s (Fed) interest rate cuts didn’t see major changes. Weighed down by a weak labor market, investors are holding their breath for the upcoming data on Retail Sales, awaiting further cues on the health of the US economy.
As for now, due to some weaknesses detected in the US labor market, investors may post their focus on the Unemployment evolution to time the start of the rate cuts. Additionally, any weakness in US economic activity may take the focus off the rise in February inflation.
Daily digest market movers: DXY trades evenly in anticipation of additional US data
- The February US Consumer Price Index (CPI) data demonstrates an unexpected rise in inflation. The headline YoY increase was 3.2% against the previous 3.1%, while core CPI rose by 3.8% on a yearly basis, in contrast to January's 3.7%.
- Upcoming US economic reports on Thursday include the Producer Price Index (PPI), expected to have risen by 1.2% YoY compared to 1.9% in January.
- Retail Sales and weekly Initial Jobless Claims will also be closely studied.
- Fed is projected to uphold current rates in the upcoming meeting in March with a mere 15% likelihood of a rate reduction in May and a slightly more probable 75% chance in June.
- The market continues to foresee an additional three rate cuts in 2024, however, a hawkish swing in the forthcoming March Dot Plot may change those forecasts.
- US Treasury bond yields are ascending with the 2-year at 4.61%, the 5-year at 4.17%, and the 10-year at 4.18%.
DXY technical analysis: DXY bears resume their path, bearish SMA crossover spotted at 103.70
Considering the technical indicators on the daily chart, selling momentum looks to be dominating the market at the moment. The Relative Strength Index (RSI), although flat, is hovering in negative territory, which signifies a bearish stand. However, the selling pressure seems to have been reduced for now as bears take a breather.
The Moving Average Convergence Divergence (MACD) is also flat with red bars, which reflects the prevailing bearish momentum but insinuates that the selling force might be losing some steam after a 1% pullback last week.
In addition, the Index is trading below the 20, 100, and 200-day Simple Moving Averages (SMAs), confirming bearish sentiment in the market. To add to that, the 20-day SMA performed a bearish cross with the 100 and 200-day averages at 103.70, which adds an argument to the negative outlook for the USD.
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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