US Dollar refrains from making further losses as yields rise to new intraday high after US CPI in line of expectations

US Dollar remains near the lows against most of its peer as the US session is not eking out further losses for the Greenback.
Traders had already priced in a drop in US inflation numbers and lock in no rate hike for this week from the US Federale Reserve.
US Dollar Index sees 103 holding firm and refraining the US Dollar from devaluing substantially.

The US Dollar (USD) has a downbeat day against most G10 and Asian currencies after US Consumer data fell in line of expectations, though no new lows for the US Dollar are being printed since the US session took over. The USD already weakened substantially this morning during the ASIA PAC and European session, influenced by a surprise rate cut by China People’s Bank Of China (PBOC) cutting its 7-day Reverse Repo rate to 1.9% from 2% and committing to further stimulus for the much-battered construction sector. Additionally, just hours ago the PBOC has also cut its overnight rate by 10 basis points to 2.75%.

The US Consumer Price Index (CPI) numbers came out in line with market consensus, confirming its decline toward more acceptable levels for the Fed. The monthly CPI came out at 0.1% against 0.4% from previous month and the monthly Core Inflation remained unchanged at 0.4%, proven its stickyness. On an annual basis, overall inflation dropped from 4.9% to 4.0%, in line with consensus, while the core inflation on an annual basis dropped from 5.5% to 5.3%, where 5.2% was expected.

Daily digest: US Dollar heads sideways after a downbeat European session

US President Joe Biden commented that the CPI report shows that progress is being made on fighting inflation.
US overall CPI month over month at 0.1%, coming from 0.4%. The core monthly CPI at 0.4% unchanged. On an annual basis, the overall inflation hits 4.0%, coming from 4.9% and the yearly core inflation heads from 5.5% to 5.3%.
The PBOC issued another rate cut minutes befor the US inflation numbers were set to hit markets. This time in its overnight lending rate by 10 basis points to 2.75%.
Bank of America Merril Lynch's monthly fund manager survey reveals that keeping investments in cash has dropped to 5.1%, which is a 19-month low. Long Big tech and short China looks to be the consensus trade amongst several funds.
US National Federation of Independent Businesses (NFIB) printed its Small Business Optimism which jumped to 89.4 from 89 previous. Expectation was for 88.5.
The Federal Open Market Committee (FOMC) is set to start its two-day meeting where Federal Reserve board voters will make a rate decision announced on Wednesday.
In the run-up to the Fed rate decision announcement on Wednesday with the speech by US Federal Reserve Chairman Jerome Powell, a few analysts have warned that the dot-plot or Phillips curve could hold a hawkish surprise and might trigger kneejerk reaction in the Greenback. The Phillips curve or dot-plot is where each Fed member pencils in their projection on where rate should go in the nearterm.
The US Treasury will head to markets again to allot a 30-year and 1-year bond auction.
China weighs broader stimulus with property support and more rate cuts after it announced a rate cut in its 7-day Reverse Repo Rate from 2.0% to 1.9%.
US equity futures rally substantially higher on the back of the further abaiting US inflation numbers with the VIX hitting a new low for the week. The Nasdaq briefly jumps above 1% and the S&P 500 hits 4,400.
The US Treasury had to pay a higher yield in order to get its auction allocated in the market on Monday evening. The yield came out at 3.791%, while 3.776% was expected.
The CME Group FedWatch Tool shows that markets are pricing in an 8% chance of rate hike for June and a 70% chance for a hike in both July and September.
The benchmark 10-year US Treasury bond yield trades at 3.76%. An earlier drop to 3.68% on the back of those US inflation numbers, gets fully paired back and even prints a new high for today at nearly 3.78%.

US Dollar Index technical analysis: USD holds the fortress at 103

The US Dollar prints more session's low against several peers, with the Dollar Index (DXY) firmly selling off now. That floor at 103 is just an inch away and does seem to hold in the aftermath of the US CPI numbers.

On the upside, 105.44 (200-day SMA) still acts as a long-term price target to hit, as the next upside key level for the US Dollar Index is at 105.00 (psychological, static level), and acts as an intermediary element to cross the open space.

On the downside, 103.02 (100-day SMA) aligns as the first support level to confirm a change of trend. In the case that breaks down, watch how the DXY reacts at the 55-day SMA at 102.55 in order to assess any further downturn or upturn.

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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