- The US Dollar trades broadly flat heading into the US CPI release on Wednesday.
- Fed Chairman Jerome Powell heads into his second day at Capitol Hill.
- The US Dollar Index (DXY) trading flat around 108.00, still looking for direction.
The US Dollar Index (DXY), which tracks the performance of the US Dollar (USD) against six major currencies, trades unchanged around 108.00 after Federal Reserve (Fed) Chairman Jerome Powell did not leave any clues for markets to pick up on, when facing lawmakers on Tuesday at Capitol Hill. Powell did not leave many clues about the timing for another interest rate cut by the central bank, if any. Traders are mulling what to do next, with US yields slowly but surely starting to head higher this week.
The economic calendar shows the Consumer Price Index (CPI) numbers for January are due on Wednesday. Expectations are not very big, with the monthly headline CPI expected to rise 0.3% compared to 0.4% in December. The monthly core CPI gauge is expected to tick up 0.3%, coming from 0.2% in the previous month. Meanwhile, Fed Chairman Jerome Powell will give a speech for the second day in a row at Capitol Hill.
Daily digest market movers: CPI up ahead
- At 13:30 GMT, the US Consumer Price Index data for January will be released:
- The monthly headline CPI measure is expected to rise by 0.3%, coming from 0.4% in the previous month.
- The monthly core inflation gauge is expected to tick up to 0.3%, compared to 0.2% in December.
- Stronger inflation numbers would fuel higher US rates and, in turn, trigger a stronger US Dollar (USD)
- At 15:00 GMT, Fed Chairman Jerome Powell will start his second day of testimony at Capitol Hill.
- At 17:00 GMT, Federal Reserve Bank of Atlanta President Raphael W. Bostic gives remarks at the Atlanta chapter of the National Association of Corporate Directors.
- At 22:05 GMT, Federal Reserve Governor Christopher Waller is set to speak at “A very Stable Conference: Stablecoin Infrastructure for Real World Applications” in San Francisco, California.
- Equities are facing some headwinds after the first day of Fed Chairman Powell’s testimony. Besides the German Dax hitting a fresh alltime high, overall most indices are trading with small gains or losses.
- The CME FedWatch tool projects a 95.5% chance that the Fed will keep interest rates unchanged at its next meeting on March 19.
- The US 10-year yield is trading around 4.54%, ticking up further for a third day in a row and recovering further from its fresh yearly low of 4.40% printed last week.
US Dollar Index Technical Analysis: Hard to read
The US Dollar Index (DXY) is stuck in a game of Cluedo, and detective Fed Chairman Powell is not giving away much to nearly no clues. With traders left clueless about what or when the Fed will make its next move, slowly but surely, bonds are getting back in the graces of traders as a safe place to be in periods of uncertainty. With this, the US Dollar should solely but surely see some inflow and tick higher.
On the upside, the first barrier at 109.30 (July 14, 2022, high) was briefly surpassed but did not hold last week. Once that level is reclaimed, the next level to hit before advancing further remains at 110.79 (September 7, 2022, high).
On the downside, 107.35 (October 3, 2023, high) is still acting as strong support after several tests last week. In case more downside occurs, look for 106.52 (April 16, 2024, high), 106.21 (100-day Simple Moving Average), or even 105.89 (resistance in June 2024) as better support levels.
US Dollar Index: Daily Chart
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.
