- The US Dollar trades flat and sees its rally stalling after CPI release.
- The recent CPI numbers still make a December rate cut possible.
- The US Dollar index trades above 106.00, around a fresh six-month high.
The US Dollar (USD) tires to continue its uprising on Wednesday, signaling it still has fuel in its tank for a push higher supported by rising US yields. The Trump trade is getting more and more priced in, and, while the Fed remains data dependent, traders are gradually paring back bets of another interest-rate cut in December, a scenario that could give the Greenback another push higher.
The US economic calendar is having one of its focal points for this week with the release of the US Consumer Price Index reading for October. Despite the very narrow ranges, all numbers came in line of expectations. That explains the muted reaction in the Greenback on the numbers.
Daily digest market movers: CPI in line of expectations
- The Mortgage Bankers Association (MBA) kicked off this Wednesday’s calendar at 12:00 GMT with its weekly Mortgage Applications tracker. This week applicatiosn rose marginally by 0.5% against the steep fall last week by 10.8%.
- The US Consumer Price Index (CPI) release for October came in as no surprise:
- Monthly headline inflation remained stable at 0.2%, and the yearly reading ticked up to 2.6% from 2.4%.
- Monthly core inflation remained unchanged at 0.3%, with the yearly figure also stable at 3.3%.
- Five Federal Reserve members are set to speak out this Thursday:
- Federal Reserve Bank of Minneapolis President Neel Kashkari is interviewed on Bloomberg TV at 13:30 GMT.
- Near 14:30, Federal Reserve Bank of New York President John Williams delivers welcome remarks at the Academy for Teachers Master Class in New York.
- Federal Reserve Bank of Dallas President Lorie Logan delivers opening remarks at the ninth joint energy conference hosted by the Federal Reserve Banks of Dallas and Kansas City near 14:45 GMT.
- Federal Reserve Bank of St.Louis President Alberto Musalem delivers a speech and participates in a Q&A session about the US economy and monetary policy at the Economic Club of Memphis at 18:00 GMT.
- Around 18:30 GMT, comments are expected from Federal Reserve Bank of Kansas City President Jeffrey Schmid, who delivers a keynote speech at the ninth joint energy conference hosted by the Federal Reserve Banks of Dallas and Kansas City.
- Equities are looking for direction after their lacklustre performance on Tuesday. Marginal gains and losses are seen in both the European and US equity markets.
- The CME FedWatch Tool is pricing in another 25 basis points (bps) rate cut by the Fed at the December 18 meeting by 62.4%. A 37.6% chance is for rates to remain unchanged. While the rate-cut scenario is the most probable, traders have pare back some of the rate-cut bets compared with a week ago.
- The US 10-year benchmark rate trades at 4.38%, dropping lower after the CPI release.
US Dollar Index Technical Analysis: Profit taking underway
The US Dollar Index (DXY) is adding more gains to its rally. That makes sense seeing where US yields are trading since this summer. The main issue could be that the trading is starting to overheat, increasing the chances of a correction soon under some profit taking.
All eyes are now on 106.52, the high of April and a double top, as it would mean a fresh 2024 high. Once the level would snap, 107.00 comes into play with 107.35 the next pivotal level to look out for.
On the downside, the round level of 104.00 and the 200-day Simple Moving Average (SMA) at 103.88 should refrain from sending the DXY any lower. Before that level, there is not much in the way with maybe some slim support at 104.63 (high of October 30).
US Dollar Index: Daily Chart
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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