- The DXY fell to its lowest level since mid-April on Wednesday.
- Weak US inflation data and unimpressive Retail Sales increase odds of a Fed interest rate cut in the near term.
- Markets are still discounting higher odds of the first cut being in September.
The US Dollar Index (DXY) is trading near 104.4 on Wednesday, showing sharp losses triggered by the softer-than-expected Consumer Price Index (CPI) and flat Retail Sales figures from April.
The US economy is showing signs of pressure as inflation in April seems to have decelerated. Federal Reserve (Fed) Chair Jerome Powell’s cautious stance, coupled with mixed Producer Price Index (PPI) readings, are highlighting concerns over future inflation dynamics, which seem to be weighing on the Greenback.
Daily digest market movers: DXY dives on soft CPI figures
- US Bureau of Labor Statistics reported a decrease in the inflation rate to 3.4% YoY, down from 3.5% in the previous month and in line with market expectations.
- Annual core CPI fell to 3.6% in April, coming down from 3.8% YoY in March and matching forecasts.
- Both CPI and core CPI reported 0.3% increase MoM in this time frame.
- Retail Sales in the US showed no growth in April, underperforming the 0.4% expected MoM rise and indicating a decline from the 0.6% MoM reported a month earlier.
- Downturn in Retail Sales may signify potential trouble for US economy, possibly sending Fed to consider sooner rate cuts.
- As per CME FedWatch tool, a hold in June is near to being priced in as odds of July cut slightly increase. The meeting with the highest odds of a cut is September’s FOMC.
DXY technical analysis: DXY shows negative bias, yet bullish signs remain
The indicators on the daily chart reflect a mixed technical picture for DXY but are largely tilted to the downside. The Relative Strength Index (RSI) displays a negative slope and is in negative territory, indicating strong selling momentum. This suggests that bears are gaining control in the immediate term. In addition, the Moving Average Convergence Divergence (MACD) shows rising red bars, signaling that bearish momentum is strengthening.
The asset’s position relative to its Simple Moving Averages (SMAs) paints some optimism for the Greenback. Despite being below the 20-day SMA and thus facing short-term selling pressure, DXY remains above both its 100-day and 200-day SMAs. This means that, despite the recent bearish push, the medium-term to long-term trend still favors the bulls. However, the bears are approaching the 200-day SMA at 104.10, which in case of breaching it would paint the technical outlook with red.
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.