US Dollar sees red as markets brace for PCE
|- US Dollar closed out a strong week and opened Monday on a soft note.
- Fed officials offer cautionary advice concerning easing cycles amidst mixed signals in the economic outlook.
- May’s PCE data will be key, as well as GDP revisions.
On Monday, the US Dollar, as portrayed by the Dollar Index (DXY), declined to 105.50, following a series of gains since early May, with investors seeming to capitalize on profits ahead of a tumultuous week.
As for the US economic outlook, a mixed picture prevails with some signs of disinflation. However, Federal Reserve (Fed) officials have chosen a cautious stance and have yet to fully adopt easing cycles. This guarded approach by the Fed continues to create an atmosphere of suspense regarding market expectations.
Daily digest market movers: US Dollar staying course, eyes on crucial data
- On Tuesday, investors will eye the Conference Board confidence report. Headline figures are expected to drop slightly to 100, hinting at tepid consumer spending activity.
- Moving to Thursday, the Gross Domestic Product (GDP) revisions for the year are anticipated to hold steady at 1.3%.
- Friday will signify a pivotal event as the May Personal Consumption Expenditures (PCE), the Fed’s preferred gauge of inflation data is due for release.
- Both headline and core PCE are expected to drop to 2.6% YoY from 2.7% and 2.8%, respectively, in April.
- Despite encouraging progress on inflation, multiple Fed officials, including Chair Powell, recommended that markets maintain composure and not exaggerate the implications of one or two months of favorable data.
- However, the market pins November as the most likely time frame for a cut but is expecting a 70% chance of a cut in September. Forthcoming data will prove to be instrumental in creating market bets.
DXY technical analysis: Positive trajectory maintained despite losses
The technical environment still portrays a positive layout with indicators situated in favorable territory. The Relative Strength Index (RSI) remains above 50, however, it inclines downward. The Moving Average Convergence Divergence (MACD) keeps constructing green bars, implying that bulls seem to be holding their grip.
Consistently, the DXY Index retains its stance above the 20, 100 and 200-day Simple Moving Averages (SMAs). Coupling these conditions with climbing indicators, it seems that the US Dollar (USD) could witness additional gains, mainly if it holds the 20-day SMA.
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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