US Dollar mildly down after S&P PMIs, PCE and GDP figures loom
|- US Dollar DXY declines towards 104.20 after mixed S&P PMIs
- Fed's steady dovish bets also added to the decline.
- PCE, durable goods orders, Q2 GDP revisions will be the highlights on Thursday and Friday.
On Wednesday, the US Dollar as measured by the DXY index went on a dip towards 104.20, largely influenced by mixed S&P PMI figures and the markets continuing to bet on a dovish Federal Reserve's (Fed) outlook.
With signs of disinflation steadily emerging, market participants are growing confident of a potential rate cut in September, yet the Fed officials continue their cautious approach, remaining dependent on the data. As such, attention is turning to key upcoming data, namely core Personal Consumption Expenditures (PCE), and Q2 Gross Domestic Product (GDP) figures on Thursday and Friday.
Daily digest market movers: DXY down as markets digest economic figures from the US
- The US private sector continued healthy expansion, with S&P Global Composite PMI rising to 55 from June's 54.8.
- Counterbalancing this, the S&P Global Manufacturing PMI fell to 49.5 from June's 51.6, while Service PMI rose slightly from 55.3 to 56.
- The CME FedWatch Tool continues to back a likely rate cut in September, although upcoming GDP and PCE data will largely determine the DXY dynamics for the remainder of the week.
Daily digest market movers: DXY flashes bearish signals
The DXY displays a neutral to bearish outlook, with key indicators remaining largely in the negative zone, including the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD). Meanwhile, bearish signals from a completed cross-over between the 20-day and 100-day Simple Moving Average (SMA) at the 104.80 area remain, and the index has fallen below the 200-day SMA confirming a negative outlook. Support lies at 104.15, and 104.00, with resistances identified at 104.30 and 104.50.
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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