- USD steady course remains unaffected by geopolitical tensions despite the lack of substantial fundamentals.
- Fed officials maintain positive projections of the US labor markets amid looming concerns of slow job growth.
- The market maintains the previous week’s predictions; the first rate cut is anticipated in September with marginally lower odds.
The US Dollar (USD), measured by the US Dollar Index (DXY), indicated continuous horizontal movement above the 103.00 level during Monday’s trading session. This follows relatively quiet market sentiment and unaltered US stock index futures, with the 10-year US yield sticking close to 4% in the earlier part of the day.
Though market expectations for upcoming monetary policy decisions remain the same, the US economic outlook continues to suggest growth above trend, insinuating a potential overestimation of the market for aggressive easing in the future.
Daily digest market movers: US Dollar stability persists ahead of inflation figures
- Market trends from the previous week transition smoothly into the current week. JPY and CHF underperformed on Monday, although global bond yields and equity markets are slightly boosted.
- Due to the lack of significant data releases on Monday, markets are upholding last week’s trends while watching for important US data releases slated for this week, including PPI, CPI, and Retail Sales data.
- The market is still fully pricing in 100 bps of easing by year-end, extending to 175-200 bps of total easing over the next 12 months.
- However, this easing path seems unlikely unless the US economy sinks into a deep recession. More data is required to redirect this dovish narrative.
DXY technical outlook: Bearish bias persists amid continuous buyer efforts
DXY’s technical outlook remains bearish, with buyers struggling to evolve a significant move. The index retains its position beneath the 20, 100 and 200-day Simple Moving Averages (SMAs), conforming to a predominantly bearish bias. The momentum-based Relative Strength Index (RSI) continues its position below 50, suggesting consistent selling pressure. Additionally, the Moving Average Convergence Divergence (MACD) remains in negative terrain, showing lower red bars. Despite the week’s gains, the overall technical outlook has not significantly improved, suggesting the continuous possibility for a correction.
Support Levels: 103.00, 102.50, 102.20.
Resistance Levels: 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.
