US Dollar dives despite stronger Jobless Claims numbers
|Most Recent Artcile: US Dollar approaches December lows following US GDP revision
- The US Dollar weaker with US GDP in line of expecations and Jobless Claims still tight.
- Equity markets are shaky after Wednesday's 500-points drop in the Dow Jones.
- The DXY US Dollar Index is torn between risk-on mood and Fed speakers pushing back on rate cut bets.
The US Dollar (USD) trades lower on Thursday in the European session, after a very calm Asian one. From a technical point of view, the US Dollar Index (DXY) is likely to face a breakout soon, and lower liquidity ahead of Christmas could lead to large moves as the economic calendar gains momentum at the end of the week.
On the economic front, some heavyweight data has hit the markets on Thursday. All eyes were on the third estimate of the US Gross Domestic Product (GDP) reading. Although not much movement is expected in this third reading, it was enough to push the DXY lower. Strangely enough markets are ignoring the strong Jobless numbers yet again.
Daily digest Market Movers: Shaky markets
- UBS is warning investors for a bull trap ahead in the current recovery rally in US equities, after the firm sell-off seen Wednesday.
- Russia tells Japan that military exercises with the US and Australia on Hokkaido are seen as a potential threat to its security.
- Angola has announced it will leave OPEC+. The news does not come as a surprise seeing the latest spat in the most recent OPEC+ gathering where Saudi Arabia asked of all participants to have production cuts. Angola and some other African nations issues vetoes against this demand.
- A very chunky batch of data was released at 13:30 GMT:
- The third estimate of US Gross Domestic Product (GDP) numbers. Economic growth was resived down to 4.9%, from the 5.2% annualized rate in the third quarter. The Personal Consumption Expenditures Prices for the quarter went from 2.8% to 2.6%..
- Weekly Initial Jobless Claims came out stronger again with Weekly Claims dropping from 213,500 to 212,000. Continuing Claims went from 1,866,000 to 1,865,000. Though seeing the initial market reaction, these numbers got ignored.
- At 16:00 GMT, the Kansas Fed Manufacturing Activity Index for December will be published. The previous number was at -3.
- Equities are struggling for direction after US equities sold off in the last trading hour on Wednesday. Japanese equities saw profit taking, with more than 1% losses in both the Nikkei and Topix indexes. European indices are down by 0.50%, while US equities futures are up 1% and are fully erasing Wednesday's decline.
- The CME Group’s FedWatch Tool shows that markets are pricing in an 87.6% chance that the Federal Reserve will keep interest rates unchanged at its January 31 meeting. Around 12.4% expect the first cut already to take place.
- The benchmark 10-year US Treasury Note trades near 3.85%, the lowest level since summer.
US Dollar Index Technical Analysis: Unable to make new lows for now
The US Dollar Index is in full consolidation mode. With clear lower highs and higher lows, buyers and sellers are pushed toward each other. A breakout looks primed for either Thursday (with the US GDP and Jobless Claims releases) or Friday (with Durable Goods and Personal Consumption Expenditures numbers). Either way, the US Dollar could still sink or rally by 1% into the last trading day before Christmas.
Any upbeat surprise in data that could contradict rate cuts bets or geopolitical events that trigger US Dollar inflow could still make the DXY head higher. On the daily chart, look for 103.00 as the first level to watch. Once trading above there, the 200-day Simple Moving Average (SMA) at 103.50 is the next important level to get to.
To the downside, the pivotal level at 101.70 – the low of August 4 and 10 – is vital to hold. Once broken, look for 100.82, which aligns with the bottoms from February and April. Should that level snap, nothing will stand in the way of DXY heading to the sub-100 region.
Inflation FAQs
What is inflation?
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%.
What is the Consumer Price Index (CPI)?
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.
What is the impact of inflation on foreign exchange?
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.
How does inflation influence the price of Gold?
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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