- The US Dollar takes a blow with a miss in PPI numbers.
- Traders see tensions in the Middle East head an echelon higher with UK and US bombing Houthi rebels.
- The US Dollar Index steadies at 102 and is going nowhere for now.
The US Dollar (USD) is receiving quite the blow from the Producer Price Index (PPI) numbers. The numbers are in contradiction against the Consumer Price Index (CPI) numbers from Thursday where an uptick was noticed in the headline inflation. The current print in US PPI numbers is undershooting on nearly all estimates and reveals a bit of a gap on what the end consumer is paying versus what the actual producer is paying for it.
Meanwhile on the world stage all eyes are on the Middle East after a UK-US task force fired around 60 rockets on Houthi controlled installations in Yemen. Meanwhile Houthi rebels have issued warnings that retaliation will be iminent and will take place soon against any UK or US ship or entitity. Tensions are rising in the region yet again since December and have their repercuttions in the energy complex with both Crude ant Natural Gas jumping higher.
Daily digest market movers: PPI is mismatch with CPI
- Cleveland Fed member Loretta Mester already spoke overnight and dampened hopes for quick rate cuts by saying that March is off the table.
- The UK and US have performed joint airstrikes on Houthi positions in Yemen. Houthi rebels said retaliation will be taking place soon.
- Producer Price Index (PPI) numbers for December are still on their disinflationary track:
- Monthly headline PPI went from 0.0% to -0.1%, instead of the projected 0.1%.
- Yearly headline PPI went from 0.9% to 1.0%; where 1.3% was expected.
- Monthly core PPI remained unchanged at 0.0% against 0.2% uptick.
- Yearly core PPI declined from 2.0% to 1.8%, in stead of staying unchanged.
- The US Dollar is weakening on the back of this disinflationary report and is giving up all of its gains in the US Dollar Index (DXY).
- Minneapolis Fed President Neel Kashkari is due to speak around 15:00.
- Equity markets are not impressed and remain at small gains for European indices, while US futures are marginally in the red ahead of the US opening bell.
- The CME Group’s FedWatch Tool shows that markets are pricing in a 95.3% chance that the Federal Reserve will keep interest rates unchanged at its January 31 meeting. Around 4.7% expect the first cut already to take place.
- The benchmark 10-year US Treasury Note holds near 3.96%, and is trading near the low for this week. The move comes as a surprise given the uptick in inflation.
US Dollar Index Technical Analysis: Back to square one for this week
The US Dollar Index (DXY) is stuck in a rut, and is not going anywhere it seems, even with recent inflation numbers not providing fuel for the DXY to jump back above 103. From a pure technical point of view, lower lows are coming in, while a sort of floor is forming, pointing to a descending triangle. Pressure is building and once the floor, around 102 snaps, it seems a given that the DXY will tank towards 101.
The first level on the upside to watch is 102.70, which falls nearly in line with the trend line from the top of October 3 and December 8. If broken and closed above, the 200-day Simple Moving Average (SMA) at 103.43 comes into play. The 104.00 level might be too far off, with 103.63 (55-day SMA) coming in as the next resistance.
A rejection by the descending trendline will give fuel to Greenback bears leading to a further downturn. The line in the sand here is 101.74 – the floor which held halfway through December before breaking down in the last two weeks. In case the DXY snaps this level, expect to see a test at the low near 100.80.
Inflation FAQs
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.
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