- The DXY rose to 104.80 on Tuesday, past the key resistance of the 100-day SMA.
- US Treasury yields soared as January’s Core CPI came in higher than expected.
- The odds of a cut in May have fallen to 40%, according to the CME FedWatch Tool.
The US Dollar (USD) witnessed an upward thrust on Tuesday, trading at 104.80 on the Dollar Index (DXY) reaching its highest level since mid-November. The Greenback was boosted by January’s Consumer Price Index (CPI), which made markets delay the start of the Federal Reserve’s (Fed) easing cycle.
After Jerome Powell, the Federal Reserve Chair indicated that a cut in March was unlikely due to the bank still needing additional evidence on falling inflation, higher inflation than expected on Tuesday benefited the US Dollar as markets begin to eye June as the start of easing.
Daily digest market movers: US Dollar soars as Core CPI from January comes in higher than expected
- Reports by the US Bureau of Labor Statistics showed a 0.4% MoM increase in the Core inflation rate for January, surpassing the consensus and previous figures of 0.3%.
- On a YoY basis, Core inflation remained steady at 3.9%, maintaining the previous numbers but outdoing the forecasted 3.7%.
- A rise in the US Treasury bond yields was observed following the data. Current rates place the 2-year yield at 4.60%, the 5-year yield at 4.26%, and the 10-year yield at 4.27%, which benefits the US Dollar.
- Market expectations for rate cuts based on the CME FedWatch Tool for the next May meeting dropped to 40%, while those odds rose to 50% for the June meeting.
Technical analysis: DXY bulls step in and conquer the 100-day SMA
On the daily chart, the Relative Strength Index (RSI) exhibits a positive slope and trades in positive territory, indicating a strong buying momentum among investors. This reveals that the market is demonstrating buyer dominance, supporting the notion of further upward market movement.
The Moving Average Convergence Divergence (MACD) histogram illustrates rising green bars, reinforcing the bullish momentum painted by the RSI. This suggests that investors are displaying a strong risk appetite and are buying the asset aggressively.
In a broader context, the index is now trading above its 20, 100, and 200-day Simple Moving Averages (SMAs), suggesting a bullish market structure. The position of the DXY above these significant SMAs bolsters the dominance of bulls on larger time frames.
In conclusion, the technical indicators on the daily chart conclusively reflect a prevalent buying momentum in the market. This, coupled with the fact that bulls are gaining ground, means a sustainable move in the upward direction would more likely be the order of the day in the foreseeable future in case bulls receive additional fundamental stimulus.
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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