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- US Dollar bleak with US CPI numbers on the docket
US Dollar bleak with US CPI numbers on the docket
- The Greenback already lost over 1.6% of its value in October.
- All eyes are on US CPI numbers later this Thursday.
- The US Dollar Index settles below 106 and is looking for support.
The US Dollar (USD) is at a crucial point in terms of positions as its summer rally quite abruptly came to a halt and took a turn for the worse. The US Dollar was unable to advance substantially on Monday when risk-off sentiment was the main theme in the aftermath of the Israel-Hamas conflict. Since then the Greenback has been retreating, and the slew of Fed speakers this week that believe the Fed is done hiking are pouring only more oil to the fire.
Traders could send the Greenback lower again with the US Consumer Price Index (CPI) numbers that will be released this Thursday. Overall expectations are for the numbers to decline further. This would confirm the recent calls from individual Fed members not to hike anymore and might send the US Dollar Index (DXY) substantially lower.
Daily digest: US Dollar is a wounded animal
- At 12:30 GMT, the CPI numbers will be released: The overall monthly index is expected to fall from 0.6% to 0.3%. The overall yearly gauge is expected to decline from 3.7% to 3.6%. The core, meaning without food and energy in the price basket, monthly index is expected to stay steady at 0.3%. The yearly core CPI will head from 4.3% to 4.1%.
- Additionally, around that same time the Initial and Continuing Jobless Claims will appear. The Initial claims are expected to head from 207,000 to 210,000. The Continuing Claims are forecast to move from 1.664 million to 1.68 million.
- The US Treasury will auction a 4-week bill and a 30-year bond.
- Equities are soaring with several indices jumping back in the green for their year-to-date performance. Should the US Dollar retreat further, expect to see even more support come in for equities.
- The CME Group FedWatch Tool shows that markets are pricing in an 88.3% chance that the Federal Reserve will keep interest rates unchanged at its meeting in November.
- The benchmark 10-year US Treasury yield is sinking lower to 4.54%. The lowest level in nearly 10 days.
US Dollar Index technical analysis: CPI to deliver the kill shot today?
The US Dollar has started to look bleak, and any chance for a quick recovery is hanging by a thread. Only a tick up in US inflation numbers could do the trick, although the current outlook does not really support that possibility. It looks inevitable that the US Dollar Index (DXY) will need to look further down in order to find ample support before having a possible recovery bounce.
For a second day in a row, the DXY opens below 106, which means that this level will be the first initial hurdle to recapture. On the topside, 107.19 is important to reach if the DXY can get a daily close above that level. If this is the case, 109.30 is the next level to watch.
On the downside, the recent resistance at 105.88 did not do a good job supporting any downturn. Instead, look for 105.12 to keep the DXY above 105.00. If that does not do the trick, 104.33 will be the best level to look for some resurgence in US Dollar strength with the 55-day Simple Moving Average (SMA) as a support level.
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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