US Dollar sees red as markets digest July's CPI

USD marks a slight decline as lower US inflation further dulls its attractiveness.
Softer but in-line CPI figures give markets reason to feed on dovish narrative.
Markets still anticipate the first rate cut in September.

Patricio Martín FXStreet

The US Dollar (USD), gauged by the US Dollar Index (DXY), showed a slight downtrend below the 103.00 threshold during Wednesday's trading session. This decrease follows the confirmation of cooler-than-expected inflation in the US, which somewhat overshadowed the stable outlook of the country's labor market.

While the market expectations regarding the upcoming decisions on monetary policy didn't change substantially, the projection of the US economic trend still points toward a growth rate above the trend. This pattern suggests that the market might again be overpricing the need for aggressive monetary easing in the future.

Daily digest market movers: Lower US inflation dampens US Dollar's appeal

The decrease in US inflation, as gauged by the Consumer Price Index (CPI), was a main decider of the day's market dynamics.
Headline CPI decelerated to 2.9% on a YoY basis in July from June's level of 3%, slightly below the market expectations.
Core CPI (which excludes the fluctuating food and energy prices) stood at 3.2% YoY, an increase from 3.3% seen in July, aligning with the market predictions.
The possibility of a cut by the Federal Reserve (Fed) in September stands at around 80%.
These future easing probabilities will be highly dependent on other economic indicators.

DXY technical outlook: Bearish outlook steady, indicators deep in negative terrain

The technical indicators of DXY point to a persisting bearish market situation with buyers failing to generate a significant uptick. The index continues to anchor below the 20,100 and 200-day Simple Moving Averages (SMA), reinforcing the dominant bearish sentiment.

The Relative Strength Index (RSI), remains near 30, indicating steady selling pressure. On the other hand, the Moving Average Convergence Divergence (MACD) stabilizes, all the while remaining in negative territory with low, red bars.

Support Levels: 102.40, 102.20, 102.00

Resistance Levels: 103.00, 103.50, 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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