US Dollar finds traction on positive GDP figures
|- US Dollar DXY trimmed losses after robust Q2 GDP figures
- US economy appears to remain resilient but dovish bets on the Fed remain steady.
- In the meantime, the Fed maintains a data-dependent stance and refrains from rushing into immediate cuts.
On Thursday, the US Dollar as presented by the DXY, experienced a mild surge after a stronger-than-expected Q2 Gross Domestic Product (GDP) report, balancing out previous losses and finding stability at 104.30. Despite this, the chances of a rate cut by the Federal Reserve (Fed) in September still remain high which appears to limit the upside to the Greenback.
The economic outlook for the US shows mixed signs but signals of impending disinflation make the market confident in a September cut by the Fed. Despite the pressure, bank officials remain reluctant to hastily implement cuts and maintain a data-dependent stance.
Daily digest market movers: US Dollar clears part of its daily loss after positive US Q2 GDP data
- The US Gross Domestic Product (GDP) for the second quarter showed an expansion at an annual rate of 2.8%, according to the first estimate by the US Bureau of Economic Analysis, released on Thursday.
- This positive reading, which exceeded the market expectation of 2%, follows a 1.4% growth reported in the first quarter.
- Other data showed that Initial Jobless Claims for the week ending July 19, reported a better-than-expected figure of 235K.
- On the negative side, June's Durable Goods Orders saw a significant drop of 6.6%.
- The CME FedWatch Tool continues to suggest a probable rate cut in September.
DXY Technical outlook: Bearish signs linger despite strong support around the 200-day SMA
Despite the potential headwinds, the DXY index oscillates around the critical 200-day Simple Moving Average (SMA) line, which provides significant support. In the meantime, bearish signals persist as, both the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) remain within the negative territory. The completed bearish crossover between the 20 and 100-day SMA on Wednesday provided an additional sell signal to the markets.
Key support levels are identified at 104.30 (200-day SMA) and 104.00 while resistance is expected around 104.50 and 105.00.
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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