Market Data 
- The US Dollar eases on Friday after some hawkish ECB comments weighed on the DXY.
- Traders’ eyes are on the US PCE Price Index data on Friday.
- The US Dollar Index popped above 101.00, holding above it.
The US Dollar (USD) trades flat to a touch softer on Friday after comments from European Central Bank Executive Board member Isabel Schnabel left European trading with a hawkish undertone. Although recent figures in the Eurozone might be pointing to disinflation, ECB’s Schnabel said that the scenario of a few consecutive rate cuts is not on the table as the ECB needs to remain cautious. This gave some oomph to the Euro (EUR) against the US Dollar (USD). Still, the US Dollar is trading only slightly softer against several other currencies as traders keep their powder dry ahead of the last bit of important economic data this Friday.
This main economic data point will be the core Personal Consumption Expenditures (PCE) Price Index, the favourite inflation gauge of the US Federal Reserve (Fed). With most analysts expecting another soft number, the PCE component under the US Gross Domestic Product release from Thursday was downwardly revised, suggesting that price pressures in the second quarter were milder than previously thought.
Daily digest market movers: Make or break
- In early Asian trading, the Chinese offshore Yuan reached its strongest level against the US Dollar since June 2023, hitting 7.0710 in USD/CNH.
- At 12:30 GMT, the Personal Consumption Expenditures (CPE) numbers for July will be released:
- Headline PCE is expected to come in a touch stronger at 0.2% on the month, up from the 0.1% increase seen in June. The yearly component should head higher as well to 2.6% from 2.5%.
- Core PCE on the month is expected to grow by 0.2%, the same pace as in June. The yearly number should head to 2.7% from 2.6%.
- Personal Income should grow at a stable 0.2% while Personal Spending is expected to tick up from 0.3% to 0.5%.
- At 13:45, the Chicago Purchase Managers Index for August will be released. The previous number was at 45.3, in contraction. The August number is anticipated to remain in contraction at 45.5.
- The last data for this Friday will be the final University of Michigan numbers for August:
- Consumer Sentiment is expected to head from 67.8 to 68.
- The 5-year Inflation expectations number should remain stable at 3%.
- Equities are set to close this week on a positive note. Asian indices all closed in the green. European and US equities are far from done for this Friday, although they are up on the day.
- The CME Fedwatch Tool shows a 67.5% chance of a 25 basis points (bps) interest rate cut by the Fed in September against a 32.5% chance for a 50 bps cut. Another 25 bps cut (if September is a 25 bps cut) is expected in November by 48.4%, while there is a 42.4% chance that rates will be 75 bps (25 bps + 50 bps) below the current levels and a 9.2% probability of rates being 100 (25 bps + 75 bps) basis points lower.
- The US 10-year benchmark rate trades at 3.86%, close to its peak for this week near 3.87%.
Economic Indicator
Core Personal Consumption Expenditures – Price Index (MoM)
The Core Personal Consumption Expenditures (PCE), released by the US Bureau of Economic Analysis on a monthly basis, measures the changes in the prices of goods and services purchased by consumers in the United States (US). The PCE Price Index is also the Federal Reserve’s (Fed) preferred gauge of inflation. The MoM figure compares the prices of goods in the reference month to the previous month.The core reading excludes the so-called more volatile food and energy components to give a more accurate measurement of price pressures. Generally, a high reading is bullish for the US Dollar (USD), while a low reading is bearish.
US Dollar Index Technical Analysis: Weekly close even more important than last week
The US Dollar Index (DXY) could be trading in a flashback moment to July 2023. The DXY back then had a rough few weeks as well, even breaking briefly below 100.00 to 99.58. What followed the week thereafter was a stellar rally of 11 consecutive weeks of gains. If the PCE inflation number comes in substantially higher then markets might revisit 2023 all over again.
For a recovery, the DXY faces a long road ahead. First, 101.90 is the level to reclaim. A steep 2% uprising would be needed to get the index to 103.18. A very heavy resistance level near 104.00 not only holds a pivotal technical value, but it also bears the 200-day Simple Moving Average (SMA) as the second heavyweight to cap price action.
On the downside, 100.62 (the low from December 28) tries to hold support, although it looks rather feeble. Should it break, the low from July 14, 2023, at 99.58 will be the ultimate level to look out for. Once that level gives way, early levels from 2023 are coming in near 97.73.
US Dollar Index: Daily Chart
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.
