- The DXY exhibits mild daily gains in Friday’s session.
- The Federal Reserve’s measured approach alongside a robust labor market reduces expectations of rate cuts.
- The market expects no chance for a March rate cut and less than a 25% chance of a cut in May.
- Investors keenly await upcoming economic reports for further insights on economic health and implications on the Fed’s stance.
The US Dollar Index (DXY) is currently at 104.10, mildly higher thanks to stable conditions in the American economy. That stability brings down hope of earlier rate cuts by the Federal Reserve (Fed), whose officials are delaying any monetary adjustments. Next week, markets will get January’s Personal Consumption Expenditure (PCE) figures, an important data set on US inflation.
The US economy showcases durable strength as signified by resilient economic activity figures, which may signify a threat to the fight against inflation. Additionally, the robust labor market, marked by lows in jobless claims, further deters prospects for near-term interest rate cuts and, therefore, limits the Greenback’s losses.
- The US Dollar trades mildly higher as the market gears up for next week’s Personal Consumption Expenditure (PCE) figures from January, setting a quiet tone for Friday’s session.
- Market expectations indicate a decreased likelihood of a rate cut in the near term as indicated by the CME FedWatch Too with low odds of easing in March or May. A strong US domestic economy and resilient labor market contribute to maintaining the Fed’s current stance, delaying the easing to June.
The indicators on the daily chart reflect mixed sentiment with both buying and selling forces battling for dominance. On one hand, the Relative Strength Index (RSI), although flat, is stationed in positive territory, hinting toward underlying bullish strength. This bullishness is supported by the DXY’s positioning above the 20-day and 200-day Simple Moving Averages (SMAs), highlighting the resilience of buyers over a longer term.
On the contrary, the Moving Average Convergence Divergence (MACD) shows rising red bars, indicating that selling momentum is building up. Moreover, the index’s positioning below the 100-day SMA suggests that bears have not completely withdrawn from the game.
It’s worth noting that the 20 and 100-day SMAs are about to perform a bullish crossover, which would provide additional traction to the buyers and push the DXY higher.
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.
