US Dollar rolls over with PCE softer than expected

The US Dollar dives lower after softer PCE
Markets are pricing in 50 basis points rate cut again.
The US Dollar Index pops out of the September range again.

The US Dollar (USD) trades lower in the Personal Consumption Expenditures (PCE) aftermath this Friday. The Greenback dips outside of the tight range in where it was stuck visible on the US Dollar Index (DXY) chart. Fed futures are pricing in again a 50 basis point rate cut, with odds for bigger cuts further down the line growing.

On the economic data front, the University of Michigan Consumer Sentiment reading that might stir up things further for this Friday. For the PCE reading, the lower core inflation metric is the main driver here for the leg lower in the DXY. The US Dollar will remain more sensitive for other key data going forward with the Federal Reserve remaining data dependent for its November decision.

Daily digest market movers: PCE tumbles

At 12:30 GMT, the Personal Consumption Expenditures Price Index for August surprised:
- Monthly headline PCE eased to 0.1% from 0.2% previously.
- Monthly core PCE fell to 0.1%, from 0.2%.
- Yearly headline PCE grew by 2.2% following the 2.5% increase in July.
- Yearly core PCE increased by 2.7% after a reading of 2.6% the month before.
- Personal Income fell to 0.2%, coming from 0.3% in July.
- Personal Spending fell to 0.2%, coming from 0.5%.
At 14:00 GMT, the University of Michigan will release its final reading for September:
- Consumer Sentiment should tick up to 69.3, from 69.0 in the first reading.
- The 5-year inflation expectation rate is expected to remain stable at 3.1%.
Asian equity markets are closing the week with a bang as China heads into the Golden Week on a high note. US futures are shooting higher with the PCE reading as catalyst.
The CME Fedwatch Tool shows a 51.3% chance of a 25 basis-point rate cut at the next Fed meeting on November 7, while 48.7% is pricing in another 50-basis-point rate cut.
The US 10-year benchmark rate trades at 3.75%, falling lower on the back of the PCE release.

US Dollar Index Technical Analysis: On to the next data

The US Dollar Index (DXY) is hesitant, with the CME Fedwatch tool back at nearly even odds for either a 25 or a 50 basis point rate cut in November. The constant switching between the two possibilities is moving the DXY in a very tight range. A substantial move is needed, and with very small expectations for the PCE number on Friday, it does not look that it will be an eventful Friday.

The upper level of the September range remains at 101.90. Further up, the index could go to 103.18, with the 55-day Simple Moving Average (SMA) at 102.30 along the way. The next tranche up is very misty, with the 100-day SMA at 103.52 and the 200-day SMA at 103.75, just ahead of the big 104.00 round level.

On the downside, 100.22 (the September 18 low) is the first support, and a break could point to more weakness ahead. Should that take place, the low from July 14, 2023, at 99.58, will be the next level to look out for. If that level gives way, early levels from 2023 are coming in near 97.73.

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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