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29.02.2024, 12:30

US Dollar retreats as traders brace for PCE inflation data

  • The US Dollar trades in the red, with the Japanese Yen as the biggest winner against the Greenback.
  • Risk-on market sentiment returns, with Crypto assets and Chinese stocks soaring.
  • The US Dollar Index slides below 104.00, breaking below several technical pivotal levels.

The US Dollar (USD) extends losses on Thursday’s European session ahead of the US Personal Consumption Expenditures (PCE) Price Index data release. The Greenback lost the most against the Japanese Yen, retreating more than 0.50%, as the Japanese currency was supported by surprise comments from  Bank of Japan (BoJ) board member Hajime Takata, who said that multiple interest-rate hikes are being considered. 

On the economic front, the big focal point on Thursday will be the Personal Consumption Expenditures (PCE) Price Index numbers for January.  Markets are anticipating a strong print after the Consumer Price Index (CPI) and the PCE print on Wednesday under the Gross Domestic Product report both came in hotter than expected. Still, this could set up the US Dollar in a perfect “buy the rumour, sell the fact” scenario, where markets already have gotten way ahead of themselves. In this case, the actual PCE print could have already been factored in and thus a weakening of the US Dollar could be the end result. 

Daily digest market movers: A lot of moving parts

  • At 13:30 GMT, both the Jobless Claims and Personal Consumption Expenditures Price Index will be released:
    • Jobless Claims for this week:
      • Weekly Initial Jobless Claims are expected to jump from 201,000 to 210,000.
      • Continuing Jobless Claims are seen decreasing from 1.862 million to 1.847 million. 
    • Personal Consumption Expenditures (PCE) Price Index for January:
      • The monthly Headline PCE is expected to accelerate from 0.2% to 0.3%, while the yearly reading is seen softening from 2.6% to 2.4%.
      • Fore the core reading, which excludes the more volatile categories of food and energy, the monthly PCE is expected to accelerate from 0.2% to 0.4%. The yearly core PCE is expected to fall slightly from 2.9% to 2.8%.
      • Personal Income is expected to increase slightly, from 0.3% to 0.4%, while Personal Spending should decelerate substantially, from 0.7% to 0.2%.
  • At14:45 GMT, the Chicago Purchasing Managers Index for February will be released. Expectations are for a jump from 46 to 48, which means the index will likely remain in contraction.
  • At 15:00 GMT, though probably less relevant for this trading day, Pending Home Sales data for January will be released. Sales are expected to decelerate sharply,  from a 8.3% increase in December to 1% in January. 
  • the last economic number for this Thursday will be the Kansas City Fed Manufacturing Activity Index for February. The previous number was at -17, with no forecast pencilled in. 
  • A slew of US Federal Reserve speakers will make its way to the stage as well: 
    • Expect around 15:50 GMT comments from the head of the Atlanta Fed, Raphael Bostic.
    • Briefly after Bostic, around 16:00 GMT, the head of the Chicago Fed Austan Goolsbee will speaking..
    • Around 18:15 GMT, Loretta Mester, head of the Cleveland Fed, will also take the stage..
    • Overnight, at 01:10 GMT, John Williams from the New York Fed will shed his light as well at the start of Friday. 
  • Equities are in the green with China leading the charge, where the Shenzhen Index jumps nearly 2%. Meanwhile, cryptocurrencies are soaring with several major coins reaching multi-year highs. In Europe, stock indices are mildly in the green and could benefit from a spillover effect from the surge in the crypto markets.. 
  • According to the CME Group’s FedWatch Tool, expectations for a Fed pause in the March 20 meeting are at 97.5%, while chances of a rate cut stand at 2.5%. 
  • The benchmark 10-year US Treasury Note trades around 4.28%, broadly unchanged for the past two days. 

US Dollar Index Technical Analysis: Make or break

The US Dollar Index (DXY) is facing an ordeal onThursday on whether it will continue its pathway for appreciation or devaluation. The DXY US Dollar index, which tracks the Greenback against a basket of foreign currencies, is unable to steer away from the 200-day Simple moving Average (SMA) at 103.74. The 200-day SMA got chopped up with a few false breaks in the past few days. The formation of lower highs point to increasing selling pressure, with bid and offer being pushed towards each other, and  the US PCE inflation data could be the catalyst for a substantial move away from the 200-day SMA. 

To the upside, the 100-day Simple Moving Average (SMA) near 103.98 is still the first element acting as a cap. Should the US Dollar be able to cross 104.60, 105.12 is the next key level to keep an eye on. One step beyond there comes 105.88, the high from November 2023. Ultimately, 107.20 – the high of 2023 – could come back into scope. 

Looking down, the 200-day Simple Moving Average at 103.74 has been broken twice recently, making it a weak support. The 200-day SMA should not let go that easily though, so a small retreat back to that level could be more than granted. Ultimately, should it lose its force with the ongoing selling pressure, prices could fall to 103.16, the 55-day SMA, before testing 103.00. 

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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