DXY Index is trading near 104.00, up for Thursday’s session.
Core PCE Price Index matched predictions.
Markets continue delaying rate cuts from the Fed, which favors the Greenback.
The US Dollar Index (DXY) is trading near 104 and keeps gaining traction due to markets delaying rate cuts from the Federal Reserve (Fed). Datawise, Personal Consumption Expenditures (PCE) showed no surprises.
As long as the US does not show conclusive evidence of inflation coming down, the Fed won’t rush to cut rates. In addition, the markets are aligned with the bank’s forecasts and are now expecting 75 bps of easing in 2024, starting in June.
Daily digest market movers: US Dollar holds gains, PCE decelerated as expected in January
The US Bureau of Economic Analysis announced on Thursday that the inflation rate in the US, gauged by the yearly change in the Personal Consumption Expenditures (PCE) Price Index, fell to 2.4% in January from 2.6% in December.
The Core PCE Price Index climbed by 2.8% over the year, also meeting expectations.
As the US economy doesn’t show conclusive evidence of inflation coming down, the markets are pushing the start of easing to June, while the odds of a cut in March and May remain low.
Technical analysis: DXY Bulls make a move to reclaim 100-day SMA
The indicators on the daily chart reflect a positive shift in buying momentum. Initially, the Relative Strength Index (RSI) exhibits a positive slope, and being in positive territory indicates a strengthening bullish trend. However, the Moving Average Convergence Divergence (MACD) shows flat red bars, hinting toward potential bearish pressure, where selling activity might prevail, though not necessarily resulting in a trend shift.
In the broader technical landscape, despite the underlying bearish pressure that has pushed the pair below the 20-day Simple Moving Average (SMA), the positioning above the 100 and 200-day SMAs suggests that buyers still have the upper hand in this play.
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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