US Dollar gets tailwind from strong sentiment data

US Dollar tries to snap losing streak as Greenback trades in the green.
All eyes on Michigan Consumer Sentiment to see if the US Dollar can close this week off the lows.
The US Dollar Index consolidates below 100.00, a weekly close above there would offer relief.

The US Dollar (USD) is getting a bit of a lift on the back of the strong sentiment numbers coming from the University of Michigan, a much needed tailwind after the massacre from earlier this week. At one point it appeared that everything was against the USD, with several inverse correlations kicking into gear. Most notable element is that the stock market has rallied throughout the week which puts a goldilocks scenario on the table where US rates will keep abating, stocks keep rallying and the Greenback will be left behind paying the bill for it all by devaluing even more.

On the economic front, there was really only one number of importance to look for which could make or break the small recovery seen in the US Dollar in the European trading session. The University of Michigan Consumer Sentiment printed a big beat on estimates and the inflation projections are coming in higher than expected against previous month. The US Dollar is receiving some tailwind and is flirting with a break back above 100.00 in the US Dollar Index (DXY).

Daily digest: US Dollar gets support from strong data

University of Michigan data suprrised on the upside on all fronts: Sentiment numbers jumped from 64.4 to 72.6 with estimates at 72.6. Current Conditions go from 69.0, over the 70.5 projected, to 77.5. The 1-year inflation expectations jump from 3.3% to 3.4% wiht the 5-year to10-year inflation projection at 3.1%. The US Dollar gets a little lift on the back of these strong numbers.
Correlations look a bit broken this Friday as the US session is about the start with the European session starting its last few hours for the week. While the US Dollar is holding up quite well, equities are popping higher with the Nasdaq printing a new 52-week high and US treasury yields are sliding to session's low.
Early on Friday, Christopher Waller from the Federal Reserve Board of Governors reiterated that the Fed needs to keep on fighting inflation and needs to keep policy restrictive for some time.
The Japanese Yen deserves a moment in the spotlight as the Japanese tiger roars back by hitting an eight-week high against the Greenback.
Equities across the globe are taking it easy this Friday with some very mild losses at -0.17% for the Japanese Topix and the Chinese Hang Seng closed at +0.33%. For the latter, some negative news came as China vows to only provide support packages for specific segments and in the global economy, but no real large support package or quantitative easing is to be in place.
European and US equity futures are flat for this Friday halfway through the European session. Although the goldilocks scenario might be the talk of the town, the earnings season could throw a spanner in the works for that straight line up to a new all time high.
The CME Group FedWatch Tool shows that markets are pricing in a 94.9% chance of a 25 basis points (bps) interest-rate hike on July 26. A second rate hike looks to be out of the question judged on the very low percentages that scenario receives for the last Fed meetings later this year.
The benchmark 10-year US Treasury bond yield trades at 3.76% and is continuing its relentless slide lower from 4.09% last week. Traders are going all-in on the goldilocks scenario where the Fed is done hiking and might even cut rates earlier as foreseen, which would see a massive boom in the economy and stock market.

US Dollar Index technical analysis: The close above 100 is within each

The US Dollar is having its worst week since its sharp correction in November last year as the Greenback is starting to bottoming out as the European trading session sees the US session joining soon. With substantial losses against the Japanese Yen (USD/JPY), Euro (EUR/USD) and Swiss Franc (USD/CHF), the US Dollar Index has lost nearly 2.5% of its value this week. As the DXY has retreated below 100.00, a weekly close above the big figure could spark hopes for the Greenback to still be able to pair back some of the losses.

In such an upside case, look for 102.73 to provide resistance at the 55-day Simple Moving Average (SMA) that will partially re-gain its importance after having been chopped up that much a few weeks ago. Only a few inches above the 55-day SMA, the 100-day SMA comes in at 102.82 and could create a firm area of resistance in between both moving averages. In case the DXY makes its way through that region, the high of July at 103.57 will be the level to watch for a further breakout.

On the downside, the US Dollar bears will look to take price action toward 99.42 as the next important technical support and once tested, that would mean a new 18-month low for the DXY. Just below there, on the weekly chart, we can find the 200-day SMA at 98.25, which is the next vital level to halt any selloffs. Although the price action resides below 100.00, a small turnaround could still be in the cards.

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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