US Dollar pops with PCE data seeing US consumers spending more than they earn

The US Dollar eases on Friday after some hawkish ECB comments weighed on the DXY.
Traders see PCE not bearing any surprises.
The US Dollar Index popped above 101.00, holding above it.

The US Dollar (USD) is turning green just ahead of the US Opening Bell after Personal Spending numbers showed consumers are starting to spend more than they earn. Earlier this Friday, comments from European Central Bank Executive Board member Isabel Schnabel left European trading with a hawkish undertone. Although recent figures in the Eurozone might be pointing to disinflation, ECB’s Schnabel said that the scenario of a few consecutive rate cuts is not on the table as the ECB needs to remain cautious. This gave some oomph to the Euro (EUR) against the US Dollar (USD). Still, the rather elevated spending component could still weigh in and push the US Dollar higher once the European session comes to an end.

The main economic data point for this Friday, the core Personal Consumption Expenditures (PCE) Price Index, the favourite inflation gauge of the US Federal Reserve (Fed), did not bear any new elements. All PCE components fell in line and even the +0.5% Personal Spending fell in line. Only a handfull of datapoints left with Chicago Purchase Managers Index (PMI) number and University of Michigan's final reading for August's Consumer Sentiment.

Daily digest market movers: Consumer is spending like it's 1999

In early Asian trading, the Chinese offshore Yuan reached its strongest level against the US Dollar since June 2023, hitting 7.0710 in USD/CNH.
At 12:30 GMT, the Personal Consumption Expenditures (CPE) numbers for July were released:
- Headline PCE went from 0.1% to 0.2% as expected for July. The yearly measure remained stable at 2.5%.
- Core PCE on the month was kept stable at 0.2% for July with the yearly component not moving at 2.6%.
- Personal Income grew at a stable 0.3% while Personal Spending ticked up from 0.3% to 0.5%.
At 13:45, the Chicago Purchase Managers Index for August will be released. The previous number was at 45.3, in contraction. The August number is anticipated to remain in contraction at 45.5.
The last data for this Friday will be the final University of Michigan numbers for August:
- Consumer Sentiment is expected to head from 67.8 to 68.
- The 5-year Inflation expectations number should remain stable at 3%.
European equities have good cards to close off this Friday in the green while US equities are jumping higher ahead of the US opening bell.
The CME Fedwatch Tool shows a 67.5% chance of a 25 basis points (bps) interest rate cut by the Fed in September against a 32.5% chance for a 50 bps cut. Another 25 bps cut (if September is a 25 bps cut) is expected in November by 48.4%, while there is a 42.4% chance that rates will be 75 bps (25 bps + 50 bps) below the current levels and a 9.2% probability of rates being 100 (25 bps + 75 bps) basis points lower.
The US 10-year benchmark rate trades at 3.87%, close to its peak for this week near 3.87%.

US Dollar Index Technical Analysis: It will be a close call

The US Dollar Index (DXY) could be trading in a flashback moment to July 2023. The DXY back then had a rough few weeks as well, even breaking briefly below 100.00 to 99.58. What followed the week thereafter was a stellar rally of 11 consecutive weeks of gains. If the PCE inflation number comes in substantially higher then markets might revisit 2023 all over again.

For a recovery, the DXY faces a long road ahead. First, 101.90 is the level to reclaim. A steep 2% uprising would be needed to get the index to 103.18. A very heavy resistance level near 104.00 not only holds a pivotal technical value, but it also bears the 200-day Simple Moving Average (SMA) as the second heavyweight to cap price action.

On the downside, 100.62 (the low from December 28) tries to hold support, although it looks rather feeble. Should it break, the low from July 14, 2023, at 99.58 will be the ultimate level to look out for. Once that level gives way, early levels from 2023 are coming in near 97.73.

US Dollar Index: Daily Chart

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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