- US Dollar recovers following last Friday’s gains.
- Inflation data takes center stage, CPI expected to show moderation.
- Fed easing expectations have steadied with market pricing in less aggressive cuts.
The US Dollar Index (DXY), a measure of the US Dollar against a basket of six currencies, extended its recovery on Monday ahead of key inflation data releases this week. Following the mixed labor market figures reported last Friday, the focus shifts to upcoming inflation data, with Consumer Price Index (CPI) figures expected to show moderation. Technical analysis indicates the potential for further US Dollar gains in the near term.
Despite positive growth indicators, the US economy faces potential risks. While the economy remains strong, the market may be overly optimistic in pricing future interest rate cuts.
Daily digest market movers: US Dollar continues recovering while market digests mixed NFPs
- US Dollar continues to make gains after last Friday’s dovish Fed comments and weaker-than-expected jobs data initially saw a sell-off.
- Greenback has staged a strong recovery and posted bullish engulfing patterns against every major currency except JPY and CHF.
- August CPI data will be reported on Wednesday with headline inflation expected at 2.6% YoY vs. 2.9% in July. Core inflation is expected to remain steady at 3.2% YoY.
- PPI data will be reported on Thursday with headline inflation expected at 1.7% YoY vs. 2.2% in July.
- Fed easing expectations have steadied with odds of a 50 bps cut this month falling to 20-25%. The market is still pricing in 100-125 bps of Fed easing by year-end.
- No Fed speakers are scheduled until Chair Powell’s press conference on September 18.
DXY technical outlook: DXY seeks 101.60 resistance
Indicators show some momentum but stay negative, striving to reclaim the 20-day Simple Moving Average (SMA) of 101.60. A breakout above this level signals a buying opportunity and enhances the short-term outlook.
Support levels exist at 101.30, 101.15 and 101.00. Resistance lies at 101.80, 102.00 and 102.30.
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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