US Dollar closes a winning week, eyes on CPI data

The DXY index trades with mild losses at 105.80, closing a 0.70% weekly gain.
Fed hawks revived USD strength during the week.
UoM consumer sentiment data come in lower than expected.
The focus shifts to next week’s inflation figure from the US from October.

The US Dollar (USD) showed minimal movement on Friday. The DXY index, which measures the value of the US Dollar versus a basket of global currencies, stood with slight losses at 105.80 as bulls seem to be taking a hiatus. The Greenback strengthened after Federal Reserve (Fed) hawks hinted that there may be further tightening, which revived the US Treasury, allowing the Dollar to gain interest.

Despite the United States’ labor market showing signs of cooling down last week, several officials, including Chair Powell, seemed unsatisfied with the progress made on inflation. They spoke with cautious tones, welcoming the recent data but leaving the door open for further tightening in case it is needed. The focus seems to have turned to next week’s October inflation figures from the US.

Daily Digest Market Movers: US Dollar flattens, consolidating weekly gains

The US Dollar Index is mildly neutral at 105.80 after rising in three out of the last four sessions.
The University of Michigan revealed that the Michigan Consumer Sentiment index from November came in lower than expected at 60.4 vs the consensus of 63.7, declining from its previous reading of 63.8.
Markets await next week’s Consumer Price Index (CPI) figures from October from the US.
The Initial Jobless Claims from the week ending November 3 came in at 217,000, lower than the expected 218,000 and fell in relation to its last reading of 220,000.
After sharply declining last week, US Treasury yields recovered throughout the week. The 2-year Treasury yield rose back to 5%, while the longer-term 5 and 10-year rates increased to 4.59% and 4.60%, which seems to be limiting downside for the USD.
Investors continue to be on the sidelines, awaiting high-tier reports to continue placing their bets on the next Fed decision.
According to the CME FedWatch Tool, the odds of a 25-basis-point hike in December are extremely low, below 10%.

Technical Analysis: US Dollar Index approaches 20-day SMA, bulls must step in

Analysing the daily chart, a neutral outlook is evident for the DXY Index. What gives the outlook neutrality is the index staying below the 20-day Simple Moving Average (SMA) but above the 100 and 200-day SMAs. Bulls are striving to regain the short-term 20-day SMA. As long as the bears hold the index below this level, the DXY will be prone to further downside.

In the meantime, the Relative Strength Index (RSI) turned flat over its midpoint, while the Moving Average Convergence (MACD) displays flat red bars suggesting that the bears momentum has flattened contributing to the neutral outlook.

Support levels: 105.80, 105.50,105.30.
Resistance levels: 106.00, 106.10 (20-day SMA), 106.30.

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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