US Dollar softens as markets adjusts their bets on the Fed
- The US Dollar Index trades with mild gains around 106.20.
- DXY is favored by a combination of factors, including Putin's threat on nuclear weapons usage.
- Fed officials have cooled on aggressive easing with Powell downplaying the need to be hasty.
The US Dollar Index (DXY), which measures the value of the USD against a basket of currencies, trades with mild gains around 106.20 on Tuesday, lifted by a combination of factors. The USD initially surged following Russian President Vladimir Putin's announcement that nuclear weapons could be used in conflicts with non-nuclear states supported by nuclear powers.
However, the Greenback has eased somewhat as the release of Chinese economic data and details of the government's stimulus package have also contributed to the USD's mild retracement.
The US Dollar remains in an uptrend, supported by strong US economic data and market uncertainty regarding Federal Reserve (Fed) interest rate cuts. Despite a recent pullback due to profit-taking, DXY has sustained its momentum and reached yearly highs near 107.00.
Daily digest market movers: US Dollar mixed, cooling dovish bets on the Fed favors the upside
- The US Dollar has eased from its recent highs as investors take profits after its recent rally against major currencies.
- Chinese economic data and details of the government's stimulus package contributed to the USD's mild pullback.
- Fed Chair Jerome Powell emphasized a cautious approach to rate cuts, highlighting the economy's strength.
- Other Fed officials, including Kugler, echoed Powell's message, stressing the need to monitor both inflation and unemployment.
- Market expectations for a December rate cut have declined in response to Powell's comments.
- On the data front, Housing Starts in the US dropped by 3.1% in October, reaching 1.311 million units, according to Tuesday’s monthly report from the US Census Bureau.
- Building Permits fell by 0.6% in October after a revised 3.1% decrease in September, which was initially reported as a 2.9% decline.
DXY technical outlook: Consolidation follows rise to annual high, overbought levels raise reversal concerns
The DXY has been in an uptrend of late, influenced by strong economic data and the Fed's cautious statements. Despite reaching a 52-week high, profit-taking has caused a slight pullback, suggesting the possibility of consolidation.
Technical indicators, including the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD), remain positive but are flat, indicating consolidation. Additionally, the index is overbought, raising concerns about a potential reversal.
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.
Author
Patricio Martín
FXStreet
Patricio is an economist from Argentina passionate about global finance and understanding the daily movements of the markets.
