- The Greenback tanks as all inflation numbers decline on all fronts.
- Traders price out any hikes and see yields decline.
- The US Dollar Index drops substantially lower as all major currencies advance against the Greenback.
The US Dollar (USD) is nosediving on Tuesday after the crucial US inflation data for October. Trades are quick to sell the Greenback now that the assumption is that yields have peaked. In terms of next steps for the US Federal Reserve, traders are seeing a 50 basis point cut in rates by June next year.
On the calendar front, the main event is now out of the way. Markets are very quickly pricing out any rate hikes possibilities that were still lingering, which means some substantial devaluation for the US Dollar Index (DXY). In the aftermath, the DXY is trading nearly 1% lower in its performance for this Tuesday.
Daily digest: US Dollar snaps important levels
- Fed Vice Chair Philip N. Jefferson, no real headlines to retain.
- At 11:00 GMT, the National Federation of Independent Business (NFIB) was released and went from 90.8 to 90.7.
- The US Consumer Price Index for October got released:
- Monthly Headline inflation went from 0.4% to 0.0%.
- Monthly Core Inflation went lower to 0.2% against 0.3% expected.
- The yearly headline inflation rate went from 3.7% to 3.2%.
- The yearly core inflation rate went from 4.1% to 4%.
- In the aftermath of the numbers, the Greenback devalued substantially by 1% or more against the Euro, Chinese Yuan and Pound Sterling.
- Chicago Fed President Austan Goolsbee is due to speak at 17:45 GMT.
- Equities are jumping higher with over 1% profit for all three major US indices, in the assumption market conditions should start to ease with the end of the Fed’s hiking cycle in mind.
- The CME Group’s FedWatch Tool shows that markets are pricing in a 94.8% chance that the Federal Reserve will keep interest rates unchanged at its meeting in December. At the start of this Tuesday, expectations were nearly 10% lower, around 85%.
- The benchmark 10-year US Treasury yield trades at 4.44%, and accelerates its decline as investors are falling head of heels in buying US bonds.
US Dollar Index technical analysis: US Dollar cracks
The US Dollar is dropping like a stone after recent US CPI data contradicted warnings of US Federal Reserve Chairman Powell and the University of Michigan inflation expectations uptick from Friday last week. Already this Tuesday morning the US Dollar Index (DXY) was signalling a possible sell off as price action closed on Monday below the 55-day Simple Moving Average. The DXY is now trading in an airpocket which sees support only near 104.18
The DXY was looking for support near 105.00, and was able to bounce ahead of it earlier last week. Any shock events in global markets could spark a sudden turnaround and favour safe-haven flows into the US Dollar. A rebound first to 105.85 would make sense, a pivotal level from March 2023. A break above could mean a revisit to near 107.00 and recent peaks printed there.
On the downside, 105.10 has been breached and is opening up a lot of room to the downside. A big air pocket is opening up with only 104.18 as the first big level, where the 100-day SMA can bring some support. Just beneath that, near 103.58, the 200-day SMA should provide similar underpinning.
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.