US Dollar stops the bleeding as US yields recover

DXY Index recovered back above 101.00 after bottoming at 100.60.
US Weekly Jobless Claims rose in the third week of December.
US bond yields slightly recovered but remain at their lowest levels in months.

The US Dollar (USD) recovered to the 101.10 area during the American session after hitting a low of around 100.60. However, dovish bets on the Federal Reserve (Fed) and negative US Jobless Claims figures may limit the upside. In addition, US bond yields edged higher, which favored the Dollar’s bounce, but they still remain at multi-month lows.

In its last 2023 meeting, the Federal Reserve acknowledged a slowdown in inflation, confirming that there won’t be rate hikes in 2024 while hinting at 75 bps of easing. The market is now pricing in a rate cut in March and another in May. The dovish bets were also fueled by US Personal Consumption Expenditures (PCE) Price Index figures last week, the Fed’s preferred gauge of inflation, as further evidence of the economy cooling down drove down the US Dollar.

Daily digest market movers: US Dollar with mild gains, cooling inflation and weak labor market may limit the upside

Dovish bets on the Federal Reserve (Fed) due to cooling inflation are the main reason the USD suffered selling pressure in the last sessions.
 In terms of job data, the US Initial Jobless Claims report from the US Department of Labor came in at 218K vs the 210k expected in the week ending December 22.
Next week, the US will report key labor market data, including a Nonfarm Payrrols report from December which could dictate the pace of the US Dollar for the short term.
US bond yields are slightly recovering. The 2-year yield is at 4.28%, the 5-year yield is at 3.84%, and the 10-year yield is at 3.85%.
Overall, markets are pricing in 160 bps of easing in 2024 vs the median of the Federal Open Market Committee (FOMC) of 75 bps.

Technical Analysis: DXY selling pressure persists despite oversold conditions

The Relative Strength Index (RSI) indicates oversold conditions in the DXY, which would traditionally be a buying signal, as it suggests the asset could be undervalued. Meanwhile, the Moving Average Convergence Divergence (MACD) shows rising red bars, which points out an increasing bearish momentum.
 
Given that the index is trading below all three key Simple Moving Averages (SMAs) – the 20, 100, and 200-day SMAs – this may serve as a confirmation of a bearish market and that this downtrend could continue. 

Support levels: 100.70, 100.50, 100.30.
Resistance levels: 101.15, 101.30, 101.50.

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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