- DXY snapped a five-day winning streak and seems to be taking a breather below 103.00
- Fed easing expectations have been tempered following last week’s jobs report
- Fed speakers are expected to reiterate a gradual approach
The US Dollar Index (DXY), which measures the value of the USD against a basket of currencies, witnessed a calm Monday session with mild losses, holding steady despite elevated levels near last week’s highs. Amidst ongoing Middle East tensions, market participants await key events this week, including the release of the Federal Reserve’s (Fed) Federal Open Market Committee (FOMC) Meeting Minutes and US Consumer Price Index (CPI) data.
While the US economy exhibits moderate deceleration, indications of economic resilience persist. Despite this, the Fed maintains a data-driven approach, emphasizing the significance of incoming economic indicators in determining the pace of interest rate adjustments. In that sense, last week’s jobs report made markets price out a 50 bps cut in November or December.
Daily digest market movers: US Dollar steady as markets await CPI data
- The probability of a 50 bps cut in November or December is now zero, according to swap markets, and a 25 bps cut next month is only 90% priced in
- Despite strong economic data, the market still anticipates 125 bps of total easing in the next 12 months
- Multiple Fed speakers this week are anticipated to emphasize data-dependency
- This week, headline and core CPI are expected to show a mild deceleration in September, and its outcome might put a stop to the USD’s upwards movement
DXY technical outlook: DXY momentum rests, resistance at 103.00
Indicators are resting after last week’s gains, with the index ending a five-day uptrend. The Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) are firmly in positive territory with room for further upside.
Supports: 102.30, 102.00, 101.80
Resistances: 103.00, 103.50, 104.00
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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