- The US Dollar is steady after its earlier retreat in European trading hours ahead of the US opening bell.
- Investors see CPI not suprrising and decide to keep amunition for the Fed meeting on Wednesday.
- The US Dollar Index trades below 104.00 and could still snap back above it.
The US Dollar (USD) is seeing US yearly headline inflation being cemented at 4%. That is still double and far from the objective of being near of below 2%. The US Federal Reserve and US Fed Chairman Jerome Powell thus will have their work cut out to contradict market anticipations that cuts might come soon, and rather will need to make clear to markets that first the inflation objective needs to be met before starting to dream of any goldilock cuts.
On the economic front, the main takeaway is the Yearly Core Inflation element in the Consumer Price Index (CPI) publication. The yearly Core CPI is stuck at 4% and unchanged against the previous month. Both the Headline and the Core monthly inflation gauges are ticking up by 0.1%. The US inflation is thus not making the same move as European inflation does, where inflation is collapsing and is rapidly unwinding.
Daily Digest Market Movers: CPI turns into non-event
- The US Consumer Price Index release for November beared no surprises:
- Monthly headline inflation wendt, as expected, from 0% to 0.1%.
- Monthly core inflation went from 0.2% to 0.3%.
- Yearly headline inflation declined from 3.2% to 3.1%.
- Yearly core inflation still stuck at 4%.
- Around 18:00 GMT, the US Treasury will allot a 30-year bond auction.
- Equities are slowely but surely heading into the green with CPI numbers out of the way now.
- The CME Group’s FedWatch Tool shows that markets are pricing in a 98.4% chance that the Federal Reserve will keep interest rates unchanged at its meeting on Wednesday.
- The benchmark 10-year US Treasury Note trades near 4.19%.
US Dollar Index Technical Analysis: Pressure is building
The US Dollar is gearing up for the first of two volatile days ahead, with US Consumer Price Index numbers this Tuesday and a Federal Reserve meeting on Wednesday. Expect to see some moves on the back of the US CPI numbers, though nothing substantial, as traders will want to hear from the Fed to see if markets are right in pricing in early rate cuts for 2024, or rather need to push those cuts further down the line. In that last case, the DXY US Dollar Index could jump above 104.00.
The DXY is retreating a touch, below 104.00, though an uptick in inflation might already move the needle in favor of the US Dollar. The DXY first needs to confirm its upward move by breaking above Friday’s high at 104.26. Once from there, the 100-day Simple Moving Average (SMA) near 104.55 looks very appealing before Wednesday’s Fed meeting.
To the downside, the 200-day SMA at 103.55 has done a tremendous job in supporting the DXY, with buyers coming in below 103.56 and pushing it back towards that same level near the US closing bell. If it fails this week, the lows of November near 102.46 is the next level to watch. More downside pressure could bring into view the 100.00 marker, particularly if US yields sink below 4%.
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.
