- US Dollar traded fairly neutral on Monday, DXY index finds support at the 104.00 area.
- Markets are increasingly confident about a September rate cut.
- Jerome Powell was on the wires on Monday but didn't provide any new insights on the policy outlook.
The US Dollar measured by the DXY maintains saw mild gains at the start of the week but remains at lows from April around 104.00. The USD softness is largely attributed to signs of disinflation in the US economy, which is fostering confidence in the markets for a potential Federal Reserve (Fed) rate cut in September.
Despite boosting market certainty of a rate cut, Fed officials are adopting a cautious stance by emphasizing that their decision remains highly reliant on data.
Daily digest market movers: USD under pressure due to weak inflation numbers, eyes on Powell
- Concerning the data releases, last week's low inflation numbers have put the USD under significant pressure, amplifying the possibility of a September rate cut.
- Federal Reserve Chairman Jerome Powell is scheduled to speak at the Economic Club of Washington DC later in the sessions, with markets keenly awaiting any hints regarding future monetary policy actions.
- This week will also see significant commentary from other US policymakers in the run-up to the monetary policy meeting on July 31.
- The CME FedWatch Tool continues to show a high probability of a rate cut in September, currently standing at around 86% for a 25 bps cut.
- The US 10-year benchmark rate is currently at its lowest since April, at 4.20%.
DXY Technical Outlook: Bearish sentiment continues as DXY remains below the 200-day SMA
The outlook is negative for the USD with daily indicators, including the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD), deeply below the 50 mark, nearing the oversold threshold. In addition, the DXY index is trading at its lowest level since April, having lost the 200-day Simple Moving Average (SMA) support.
While it has lost more than 0.80% since the end of last week, a mild upward correction may be possible with the mentioned SMA at 104.40 as the main resistance to target.
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.
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