US Dollar set for CPI fireworks on Tuesday in slow Monday trading

The US Dollar opens up flat despite some turmoil over the weekend.
Traders are looking forward to the main event this week on Tuesday with US CPI numbers.
The US Dollar Index still trades at 104 and could drop substantially lower if disinflation continues.

The US Dollar (USD) is flat this Monday after the US opening bell, despite two main elements that were making the news over the weekend which would favor some US Dollar strength. First and foremost were the controversial comments from former US President Donald Trump who said he would “encourage” Russia any North Atlantic Treaty Organization (NATO) country that did not meet its financial contribution to NATO.

Trump’s comments triggered panic across Europe since it is a sign the US could possibly fully retract its support for Ukraine if Trump gets elected. The second chunk of geopolitics to impact markets was the assault on Rafah by the Israeli army, which has surrounded the city and is trying to eliminate any remaining Hamas strongholds.

On the economic front, an already juicy start to the week beckons with no less than two US Federal Reserve members making an appearance. Traders though will try to keep their powder dry for the main event on Tuesday with the US Consumer Price Index numbers for January scheduled for release. Past Friday’s revisions, using a new calculation method, pointed to more disinflation. So any further disinflation would mean some US Dollar weakness ahead.

Daily digest market movers: Expectations are growing for more disinflation

The European Union is ready to propose trade curbes with Chinese firms which have ties with the Russian War.
A $95 billion aid bill for Ukraine, Israel and Taiwan received enough support to be moved forward for voting through the US Senate.
Several European heads of state have already condemned the comments from former US President Trump on Russia and its free pass to enter Europe in case Trump got elected.
Michelle Bowman, who is a governor at the US Federal Reserve, was due to speak. Though her speech did not bear any markets or monetary policy comments.
The US Treasury is heading to markets this Monday with an auction with a consignment of 3-month and a 6-month Bills near 16:30.
US Minneapolis Fed Neel Kashkari is set to speak near 18:00.
The Financial Management Service is due to release the Monthly Budget Statement, with expectations for January of $-21 billion, from $-129 billion previously.
Equity markets are a bit clueless this Monday, not really storming out of the gates. Biggest element to point out this Monday is that China is closed this week due to the holiday period. European indices are halfway through the European session mildly in the green.
The CME Group’s FedWatch Tool is now looking at the March 20th meeting. Expectations for a pause are 82.5%, while 17.5% for a rate cut.
The benchmark 10-year US Treasury Note trades near 4.16%, at the start of this Monday.

US Dollar Index Technical Analysis: Push and Pull expectations

The US Dollar Index (DXY) is showing fatigue – that was the broad takeaway from the technical analysis from Friday. With several falls breaks and even a firm decline on Friday against the 100-day Simple Moving Average (SMA) at 104.26, is the writing on the wall for US Dollar bulls saying they are not willing to go the extra mile to push the DXY higher. Expect some retreat, which would fall in line if CPI numbers on Tuesday reveal disinflation. This could see the DXY head to either the 200-day SMA (103.63) or the 55-day SMA (103.02).

Should the US Dollar Index move higher again, first look for a test at the peak of last week Monday, near 104.60. That level needs to be broken and is more important than the 100-day Simple Moving Average snap at 104.26. Once broken above last Monday’s high (February 5), the road is open for a jump to 105.00 with 105.12 as key levels to keep an eye on.

The first ideal candidate for support is the 200-day SMA near 103.63. Should that give way, look for support from the 55-day SMA near 103.02 itself. Should those fail, look for 102.00 as a big figure to do the necessary.

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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