US Dollar tallies another day of losses on the back of dovish Fed outlook

The DXY Index observed losses, and declined towards 102.00.
Fed’s Barkin: “If inflation comes down, the Fed will respond”.
Investors focus is set on Friday’s PCE data.

Patricio Martín FXStreet

The US Dollar (USD) Index, trading at 102.00, and is currently in the grips of a downward trend, heavily influenced by falling yields and dovish comments from Federal Reserve's (Fed) Thomas Barkin, which fueled further easing bets on the next decisions from the bank.

The Fed's dovish outlook, coupled with cooling inflation figures, recently weighted to the US dollar's strength, as the bank pointed out that its officials are seeing more rate cuts than expected in 2024. In line with that, November’s Personal Consumption Expenditures (PCE) figures, due on Friday, may affect the Greenback price dynamics as they could give more strength to the case of earlier rate cuts next year.

Daily Market Movers: US Dollar down on lower yields, dovish Barkin comments

The US Dollar is experiencing losses, resuming its downward path influenced by falling yields and dovish comments from Thomas Barkin. Housing data failed to trigger a reaction on the Greenback.
Housing Starts statistics for the November report by the U.S. Census Bureau came in at 1.56M, against the consensus of 1.36M and the previous figure of 1.359M, indicating an increase in construction activity.
Building Permits data for November surprisingly fell to 1.46M, below the expected consensus of 1.47M and the previous figure of 1.498M.
Market attention is pivoting towards the upcoming report of the Core Personal Consumption Expenditures (PCE) Price Index on Friday, which will provide insights into spending trends and inflationary pressures.
US bond rates for 2, 5, and 10-year bonds, currently trading at 4.43%, 3.90%, and 3.91%, respectively, are experiencing a downtrend, which lowers the demand for USD.
Thomas Barking was seen as optimistic about the inflation outlook, commenting that demand and inflation are normalizing and that good progress is being made. He then pointed out that the bank will respond if inflation continues this path.
According to the CME FedWatch tool, markets anticipate potential rate cuts by March 2024.

Technical Analysis: Bearish dominance continues, bulls fail to maintain momentum

The negative slope and territory of the Relative Strength Index (RSI) suggest continued bearish momentum aligning with the rising red bars of the Moving Average Convergence Divergence (MACD). This comes after bulls gained some ground in the last session but failed to maintain it to continue edging higher.

Meanwhile, on a more macro level, the index persistently stationed below the 20, 100, and 200-day Simple Moving Averages (SMAs) speaks for the pervasive selling domination. This ongoing bearish stance mirrors a firm control by the bears.

Support levels: 101.80,101.50, 101.30.
Resistance levels: 103.30 (20-day SMA), 103.50 (200-day SMA), 104.00.

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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