- Markets on edge over the Fed’s preferred inflation gauge: PCE.
- In case PCE numbers drop substantially, expect substantial US Dollar weakness to unfold.
- The US Dollar Index clings on to an 11th weekly positive close, though it will be a close call.
The US Dollar (USD) is trying to hold on to another weekly gain, though it looks like either a make-or-break deal. If the US Dollar holds onto gains, this would be the 11th consecutive weekly gain for the US Dollar Index (DXY).
While the US Dollar Index closed each week near the high of that same week, that does not look to be the case for this week. With the United Auto Workers (UAW) union strikes continuing, more independent workers joining the picket lines and a US federal government shutdown expected to start this weekend, things are starting to look grim for the Greenback.
From the economic datafront, some oil to the fire might be added with the Federal Reserve’s (Fed) preferred inflation gauge: the Personal Consumption Expenditures indices. Should those components fall further below estimates, markets could pick this up as a sign that the Fed is done hiking. The rate differential then might still support the Greenback, though some repricing would make the US Dollar retreat a few figures against several major currencies in the coming days.
Daily digest: US Dollar at pivotal point
- Fireworks are expected at 12:30 GMT with the Personal Consumption Expenditure (PCE) index in all its forms: The Core MoM is expected to stay steady at 0.2%, while the yearly component drops from 4.2% to 3.9%. Headline PCE on a monthly basis is expected to rise from 0.2% to 0.5%, with energy the main driver here for the uptick. The yearly gauge is expected to head from 3.3% to 3.5%.
- Additionally, traders will see the Personal Income and Spending for the month of August: Income is expected to rise from 0.2% to 0.4% for the month, spending to decline from 0.8% to 0.4%.
- Near 13:45 GMT, the Chicago Purchasing Managers Index (PMI) for September comes out, with another decline expected from 48.7 to 47.6.
- Closing off the week will be with the Michigan Consumer Sentiment and the Inflation Expectation. Bear in mind these are final readings, so no real shockers are expected here. Consumer Sentiment is expected stay steady at 67.7, while the inflation expectation is expected to hold at 2.7%.
- Equities are mixed with Hong Kong’s Hang Seng Index roaring over 3%, while in Japan the Nikkei and the Topix are down for this Friday at their closing bell. The Nikkei is even trading near a one-month low. In Europe a turnaround looks to be in the making with European equities mildly in the green and US equity futures in a similar pattern.
- The CME Group FedWatch Tool shows that markets are pricing in an 82.7 % chance that the Federal Reserve will keep interest rates unchanged at its meeting in November.
- The benchmark 10-year US Treasury yield trades are lower at 4.54%, which is quite a step away from 4.48% earlier this week. Investors are starting to buy bonds in order to safely park funds over the weekend with the government shutdown at hand.
US Dollar Index technical analysis: flat for the week
The US Dollar tries to cling on to gains as this week might be proven pivotal for its winning streak since the summer. The US Dollar Index is set to print its 11th straight weekly gain, though headwinds are building up. With the UAW strike, the US Government shutdown and GDP miss are signs not to be ignored with possibly a firm unwind of the current Dollar bull positions that have been built up.
The US Dollar Index opened around 106.15, though the overheated Relative Strength Index (RSI) starts to ease and is out of the overbought area. Traders that want to hit a new 52-week high need to be aware that a lot of road needs to be covered toward 114.78. Rather look for 107.19, the high of November 30, 2022, as the next profit target on the upside.
On the downside, the recent resistance at 105.88 should be seen as first support. Still, that barrier has just been broken to the upside, so it isn’t likely to be strong. Instead, look for 105.12 to do the trick and keep the DXY above 105.00.
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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