US Dollar struggles to gather momentum, eyes on Jobless Claims

After reaching a high of 105.90, the DXY index declined to 105.60.
Long-term US government bond yields are declining after rebounding from multi-week lows.
On Thursday, the US will release weekly Jobless Claims.
Chair Powell didn’t comment on monetary policy on Wednesday.

The US Dollar (USD) accelerated its gains in Wednesday's session with the DXY index, which measures the value of the US Dollar versus a basket of global currencies, escalating to a high of 105.90 earlier in the session. That said, the index reversed its course and declined towards 105.60, weighed down by falling Treasury yields. No highlights were seen during the session.

Markets remain quiet this week as investors await fresh catalysts to place their bets on the next Federal Reserve (Fed) decision in December. Several officials were on the wires on Monday and Tuesday but didn’t provide any highlights. The focus seems to have turned to next week’s October inflation figures from the US.

Daily Digest Market Movers: US Dollar upside limited as US yields lose traction

The US Dollar Index stands with mild gains at 105.60.
No high-tier reports will be released this week. Markets await next week’s inflation figures from the US and are still digesting last Friday’s US Nonfarm Payrolls report.
The US Bureau of Labor Statistics reported that the Nonfarm Payrolls from October came in lower than expected. The US added 150,000 jobs in October vs the expected 180,000 and decelerated from its revised previous figure of 297,000.
The Unemployment Rate came in at 3.9% in October, above the expected 3.8% and accelerating compared to its previous reading of 3.8%.
Average Hourly Earnings increased by 0.2% MoM but rose 4.1% YoY, higher than the expected 4% but beneath the previous reading of 4.3%.
Meanwhile, the 2-year Treasury rate is flat at 4.90%, while the longer-term 5 and 10-year rates declined to 4.53% and 4.52%, respectively, which seems to be limiting upside for the USD.
According to the CME FedWatch Tool, the odds of a 25-basis-point hike in December are extremely low, around 10%.
Escalating tensions arise in the Middle East after an American plane was shot down by Yemeni soldiers, news that may provide a cushion to the Greenback.

Technical Analysis: US Dollar Index struggles to gain momentum, bears around the corner

Based on the daily chart, the DXY Index shows indications of bullish exhaustion, leading to a neutral to bearish technical outlook. The Relative Strength Index (RSI) shows a weakening bullish trend with a negative slope below its midline, while the Moving Average Convergence (MACD) exhibits neutral red bars.

What gives the outlook neutrality is the index staying below the 20-day Simple Moving Average (SMA) but above the 100 and 200-day SMAs, indicating that the bulls still have the upper hand in the broader picture.

Support levels: 104.90, 104.70, 104.50.
Resistance levels: 105.80, 106.00, 106.15.

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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