- The DXY index declined to 105.60, still consolidating last week’s gain.
- US October’s headline CPI is expected to have decelerated, and the core measure to remain stagnant.
- The economic docket features no relevant high-tier reports on Monday.
The US Dollar (USD) slides on Monday with the DXY index, which measures the value of the US Dollar versus a basket of global currencies, falling to 105.60 on the back of declining US bond yields and investors taking profits from last week’s gains. Focus now shifts to Tuesday’s Consumer Price Index (CPI) data from October and Retail Sales figures from the same month on Wednesday.
Even though the United States labor market has started to show signs of weakness, several Federal Reserve (Fed) officials, including Chair Powell, hinted that the work on inflation isn’t done and opened the door for further monetary tightening. In that sense, as the central bank remains data-dependent, high-tier data will shape the decision of the Fed’s last meeting in December. For now, according to the CME FedWatch Tool, the odds of a hike are low, near 10%, but swaps markets seem to be delaying interest rate cuts from May to June.
Daily Digest Market Movers: US Dollar flattens, consolidating weekly gains
- The US Dollar Index stands around 105.60 for a 0.20% loss.
- Markets await next week’s Consumer Price Index (CPI) figures from October in the US.
- Headline CPI is expected to decline to 3.3% YoY, while the core measure is forecasted to remain at 4.1% YoY.
- Retail Sales are expected to have contracted by 0.3% in October.
- US Treasury yields have edged higer on Monday, while the 2-year rate declined to 5.04%.
- According to the CME FedWatch Tool, the odds of a 25-basis-point hike in December are extremely low, below 10%.
Technical Analysis: US Dollar consolidates as bulls take a breath
The daily chart suggests that the DXY Index holds a neutral to bullish technical bias as charts show a brief consolidation period, indicating that the bulls are catching their breath after a gaining week. The Relative Strength Index (RSI) indicates a neutral stance below its midline, displaying a flat slope in negative territory, while the Moving Average Convergence (MACD) displays neutral red bars.
Evaluating the broader scale technical outlook, the pair is below the 20-day Simple Moving Average (SMA) but above the 100 and 200-day SMAs, suggesting that the bulls are in control on the broader time horizon but still need to put in extra effort to assert dominance in the short run.
Support levels: 105.50,105.30, 105.00.
Resistance levels: 106.00, 106.05 (20-day SMA), 106.30.
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%.
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.
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.
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.