US Dollar advances as markets finally price in more hikes from the Fed

The US Dollar off the lows as US data beats expectations on all fronts.
Main focus on ISM Service numbers and ADP, both delivered a massive surprise with an upbeat result.
The US Dollar Index is back above 103.00, but is unable to consolidate gains.

The US Dollar (USD) is clawing back in a very choppy trading day as ADP numbers, jobless claims and ISM services support the Greenback, after the Federal Reserve (Fed) FOMC Minutes showed a vote split in terms of hiking interest-rates in June instead of pausing. This tilted the minutes to a hawkish result, putting the future path in rates back on top of the bulletin board in terms of drivers. The prospect of further hikes by the Fed prompts the Dollar to diverge against several G10 currencies as some central banks have already announced either a steady monetary policy rate or even signalled cuts soon. The best example is the Polish Zloty (USD/PLN) and Australian Dollar (AUD/USD), which are both falling back nearly 0.50% against the Greenback.

On the economic data front, Thursday has already brought the weekly jobless claims data and ADP ahead of Friday’s key US jobs report. Lorie K. Logan, the president of the Federal Reserve Bank of Dallas, is due to speak at 12:45 GMT. Although a lagging indicator, the JOLTS report for May – due at 14:00 GMT – is expected to shrink below the 10 million number.

Daily digest: US Dollar has amunition to head higher

After ADP and Jobless claims data, the US 10-year yield jumped over 4% for the first time since March 9. The US 2-year yield exceeds 5% and approaches a 2023 high.
US Treasury Secretary Janet Yellen is set to arrive at Beijing amidst rising pressures between the US and China. Meanwhile China's president Xi Jinping tells China military to firmly safeguard sovereignty.
Some tensions and risks to keep in mind as well with an OPEC meeting taking place in Vienna today. Watch out for any comments on more Oil production cuts. Meanwhile, overnight Iran allegedly tried to seize two oil tankers in the Hormuz Strait. The attempt got foiled by the US military. Western Texas Intermediate (WTI) Crude oil price is very much correlated with the US Dollar.
Automatic Data Processing Inc. (ADP) issued its monthly Employment change numbers for June, and it was a staggering beat. Private payrolls jumped by 497,000 against 267,000 from the previous month.
Jobless claims supported that strong ADP number as unemploymnet is not really ticking up: initial claims jumped from 236,000 to 248,000 while continuing claims declined from 1,733,000 to 1,720,000. All quiet thus on the jobless front with no massive layoffs yet to be reported.
Lorie K. Logan, the president of the Federal Reserve Bank of Dallas, mentioned that the Fed still needs to do more, with more restrictive monetary policy.
The Institute for Supply Management (ISM) came ou with numbers for June: Services Index jumped from 50.3 to 53.9 which is a beat on expectations at 51.2. Priced Paid eased a touch from 56.2 to 54.1, and employment jumped from 49.2 to 53.1. In summary this means that services are not cooling down and will remain feeding the sticky core inflation in the US for now.
The US Bureau of Labor Statistics issued the JOLTS Job Openings report that fell lower from 10,103,000 to 9,824,000. That is a touch lower than the 9,885,000 expected, while the 10,103,000 got revised higher to 10,320,000. Job Openings were thus cooling down in May, though still at elevated levels.
With the US holiday on Tuesday, the US Energy Information Administration (EIA) will provide US stockpile information on crude and other derivatives at 15:00 GMT.
The Chinese central bank, the People’s Bank of China (PBoC), is stepping up its efforts to support the Yuan by fixing the Chinese currency this morning at 7.2098, lower than the 7.2458 estimated.
In the slew of the Fed FOMC report, John Williams, president of the Federal Reserve Bank of New York, said that inflation is still too high.
The US Dollar is stuck in choppy trading against the Euro as Purchasing Manager Index numbers fell below 50 for France and Italy. Both Europe and the US are thus seeing contractions in their PMIs. At the same time, the European Central Bank (ECB) published a survey of inflation expectations, which have been revised to the downside. This adds to evidence of subsiding inflation pressures, making it more likely that the ECB will end its hiking cycle sooner than markets anticipate.
The release of the Fed FOMC Minutes showed that there was a vote split in June, with some hawks in favor of hiking interest rates. This was considered as hawkish by market participants, as did the closing remark that all officials expect more rate increases, in plural, for the remainder of 2023.
Asian markets got spooked by the hawkish tone of the Fed and are seeing investors chun away from risk assets. The Japanese Topix is down 1.26%, and the Hang Seng is having a gruesome day as it falls over 3%. European equities are knocked out and are flirting with closing levels near down 2%. US equities meanwhile are trying to digest the possibilty that Fed will hike more than once, and see their performances down over 1% for today.
The CME Group FedWatch Tool shows that markets are pricing in a 91.1% chance of a 25 basis points (bps) interest-rate hike on July 26. Markets are finally stepping away from their reluctance to price in a second hike, by seeing November futures rise to 46% vs 36% before the data.
The benchmark 10-year US Treasury bond yield extends trading at 4.04% as strong ADP and muted jobless numbers trigger a move higher in yields, after already a wild ride on Wednesday evening, when the FOMC Minutes got published. Equities drop and bonds sold off, making rates shoot higher as more hikes look inevitable in the fall of this year.

US Dollar Index technical analysis: USD near flat above 103.00

The US Dollar is able to pump itself back up above 103.00 in the US Dollar Index after ADP and Jobless claims number help the Greenback to trade back in the green. Just minutes before those two datapoints came out, the US Dollar was losing against every G10 currency. The US Dollar Index jumps higher as ISM numbers were able to turn the positive sentiment in EUR/USD in favor of a stronger US Dollar, with the DXY just a few points away from its opening price at 103.34 for today.

On the upside, look for 103.54 as the next key resistance level, which falls in line with the last week’s high. The 200-day Simple Moving Average (SMA) at 104.77 is still quite far away. So the intermediary level to look for is the psychological level at 104.00 and May 31 peak at 104.70.

On the downside, the 55-day SMA near 102.80 has proven its importance as it clearly underpinned price action on Friday and Monday by triggering a turnaround after the firm weakening of the Greenback. A touch lower, 102.50 will be vital to hold from a psychological point of view. In case the DXY slips below 102.50, more weakness is expected with a full slide to 102.00 and a retest of June’s low at 101.92.

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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