US Dollar tests weekly lows with investors bracing for US PCE inflation


  • The US Dollar is losing steam ahead of the release of the US PCE Price Index report.
  • A moderately hawkish BoJ Governor Kazuo Ueda and higher inflationary pressures in the Euro Area have weighed on the USD.
  • Failure to break the 104.55 resistance has brought 103.90 support into focus. 

The US Dollar Index (DXY) edges down on Thursday, extending the mild losses seen over the last four sessions. Still, the US Dollar (USD) remains near three-month highs and is on track to close its best monthly performance in more than two years. 

US macroeconomic data continues endorsing the rhetoric of a strong economy in a period of global slowdown, which gives the USD a competitive advantage against the rest of the major currencies.

The ADP employment report beat expectations on Wednesday, easing concerns about a deterioration of the labour market and improving investors’ expectations about Friday’s Nonfarm Payrolls (NFP) report.

Daily digest market movers: The US Dollar extends losses following a pick up on Eurozone inflation

  • Eurozone Consumer Prices Index (CPI) data for October has revealed higher-than-expected inflationary pressures. This,  combined with the positive surprise in the Q3 GDP, has dampened hopes of aggressive interest-rate cuts by the ECB, providing some support to the Euro (EUR).
     
  • The Bank of Japan (BoJ) kept interest rates unchanged on Thursday but Governor Kazuo Ueda signaled further monetary normalization if conditions are met. This has given some oxygen to a battered Japanese Yen (JPY), adding pressure to the USD.
     
  • The US ADP Employment showed a 233K increase in private-sector payrolls in October, well above the 115K expected. September's reading was revised up to 159K from 143K.
     
  • Q3 US Gross Domestic Product data, also released on Wednesday, missed estimates with a 2.8% annualized growth. The figures fell short of the 3% expected but they are still consistent with a solid economy.
     
  • Wednesday’s data bolstered the case for gradual easing by the Federal Reserve (Fed) but did not add anything new to significantly alter the outlook about the future path of interest rates. The immediate positive impact on the Dollar faded shortly afterward.
     
  • The Personal Consumption Expenditures (PCE) Price Index, the Fed’s inflation data of choice, is expected to show that price pressures continued to ease, with the core reading down to 2.6% yearly from 2.7% in September. The data will be published at 12:30 GMT.
     
  • The main attraction will be Friday’s Nonfarm Payrolls (NFP) report, which is expected to show a significant decline in new payrolls. If these figures are confirmed, the US Dollar could correct further. 

DXY technical outlook: Approaching support area at 103.90

The DXY index maintains its bullish bias intact but failure to break the resistance area above 104.55 has increased the bearish pressure, sending prices to test the bottom of the recent range at 103.90.

The 4-hour Relative Strength Index (RSI) shows a bearish divergence, and price action has crossed below the 50-period Simple Moving Average (SMA). These are negative signs. Further depreciation below 103.90 would confirm a deeper correction and bring 103.40 into focus. Resistances remain at at the 104.55-104.75 area and 105.20.

 

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.

 

Share: Feed news

Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.

If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.

FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.

The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.

Recommended content


Recommended content

Editors’ Picks

EUR/USD keeps its daily gains below 1.0900 post-US PCE

EUR/USD keeps its daily gains below 1.0900 post-US PCE

The bearish sentiment in the US Dollar remains unabated and supports EUR/USD's constructive outlook, keeping it in the upper-1.10800s after the release of U.S. inflation data, as measured by the PCE, on Thursday.

EUR/USD News
USD/JPY trims losses and approaches 153.00

USD/JPY trims losses and approaches 153.00

Following an earlier decline below 152.00, USD/JPY now manages to regain some composure and advance to the vicinity of the 153.00 barrier. The initial strong bullish move in the Japanese Yen came after BoJ's Ueda left the door open to a potential rate hike in December at the bank's meeting early onThursday.

USD/JPY News
Gold corrects lower to $2,770 following US inflation prints

Gold corrects lower to $2,770 following US inflation prints

Gold remains on the back foot near $2,770 per troy ounce, as US inflation data ticked lower in September, while US yields display a negative performance across the curve.

Gold News
Eurozone inflation up to 2% in October as unemployment hits new record low

Eurozone inflation up to 2% in October as unemployment hits new record low

The Eurozone’s inflation rate increased more than expected, with core inflation stable at 2.7%. The direction of incoming data in the region is not quite clear, which provides the ECB with confusing signals for the path of rate cuts.

Read more
Bank of Japan holds rates steady amid signs of modest GDP growth

Bank of Japan holds rates steady amid signs of modest GDP growth

Monthly industrial production results have been mixed but generally indicate a modest recovery in third-quarter GDP. Clear guidance from the Bank of Japan remains elusive, with each upcoming meeting being pivotal.

Read more
Best Forex Brokers with Low Spreads

Best Forex Brokers with Low Spreads

VERIFIED Low spreads are crucial for reducing trading costs. Explore top Forex brokers offering competitive spreads and high leverage. Compare options for EUR/USD, GBP/USD, USD/JPY, and Gold.

Read More

Forex MAJORS

Cryptocurrencies

Signatures