- US Dollar loses momentum on decelerating CPI figures.
- Market now more certain of September cut.
- US Treasury yields fall, making traders lose interest in USD.
The US Dollar has extended its losses and the DXY index slips further on Thursday, mainly due to the decelerating inflation figures from the US Consumer Price Index (CPI), which makes an even better case for a September interest rate cut by the Federal Reserve (Fed).
Though markets are getting increasingly confident about the rate cut, Fed officials remain cautious and have indicated that they are not in a hurry to implement changes without studying data-driven indicators thoroughly.
Daily digest market movers: DXY under stress as inflation softens and markets expect a rate cut
- Keeping with his earlier stance, Fed Chair Powell reiterated that the Fed’s job is not yet done when it comes to managing inflation and even suggested the Fed has more work to do.
- He indicated that the confidence to lower rates based solely on inflation is not sufficient yet, but also pointed out that the Fed doesn’t need inflation to be under 2% before rate cuts begin.
- On the data front, the US Consumer Price Index (CPI) for June reported a decline to 3% YoY from 3.3% in May as per the US Bureau of Labor Statistics (BLS), below the market’s expectations. The core measure rose by 3.3% YoY, lower than the 3.4% expected.
- Amid continued signs of inflation softening, market participants’ confidence in a potential rate cut in September strengthens, placing downward pressure on USD.
DXY technical outlook: Negative outlook intensifies as DXY loses 100-day SMA
The DXY index losing its 10-day Simple Moving Average (SMA) has stirred up a negative outlook for the USD with both the Relative Strength Index (RSI) and the Moving Average Convergence Divergence (MACD) indicators swinging into negative trajectory.
The 100-day SMA threshold has been breached, intensifying the bearish tone. The next potential backstop for further declines could be noted at the 200-day SMA level, providing a critical bottom for the market.
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.
