US Dollar Index takes a turn to the downside as University of Michigan numbers underscore stagflation concerns
- Markets are chasing safe havens such as Gold to fresh all-time highs.
- Traders see US PCE and University of Michigan numbers release adding to equity sell off.
- The US Dollar Index trades flat around 104.30, though no safe-haven flow in the Greenback.
The US Dollar Index (DXY), which tracks the performance of the US Dollar (USD) against six major currencies, is currently flat near 104.30 at the time of writing on Friday. Traders are not really looking at the Greenback but rather at an exodus from Equities and Cryptocurrencies into the precious metals’ market, where Gold has hit another all-time high this Friday at $3,086. The reciprocal tariff deadline is approaching fast, April 2, and clearly has struck a nerve amongst traders and market participants.
On the economic data front, all eyes were on the Federal Reserve (Fed) preferred inflation gauge, the US Personal Consumption Expenditures (PCE) data for February. Nog big beats or surprises. Later this Friday Fed Vice Chairman Michael Barr and Atlanta Fed President Raphael Bostic are still due to speak.
Daily digest market movers: Inflation expectations pick up
- The US Personal Consumption Expenditures data for February has been released:
- The monthly headline PCE came in at 0.3% as expected, unchanged from the previous 0.3%. The yearly gauge remained stable at 2.5%.
- The monthly core PCE grew by 0.4%, beating the 0.3% expected. The yearly core PCE ticked up to 2.8% from 2.6%.
- At the same time, the US Personal Income month-on-month for February jumped to 0.8%, a big beat of the 0.4% expected and from 0.9% previously. The US Personal Spending for February fell to 0.4%, below the expected 0.5%, coming from the previous contraction of 0.2%.
- The University of Michigan Consumer Sentiment Index reading for March cames in softer at 57, missing the 57.9 estimate and previous reading. The 5-year Consumer Inflation Expectations surged to 4.1% from 3.9% previously.
- At 16:15 GMT, Federal Reserve Bank Vice Chair for Supervision Michael Barr will speak on Banking Policy at the 2025 Banking Institute in Charlotte, N.C.
- At 19:30 GMT, Federal Reserve Bank of Atlanta President Raphael Bostic will moderate a policy panel at the third annual Georgia Tech-Atlanta Fed Household Finance Conference at the Atlanta Fed, Atlanta, Georgia.
- Equities are diving lower with losses between 0.5% to 2% crossing from Asia over Europe and into US futures.
- According to the CME Fedwatch Tool, the probability of interest rates remaining at the current range of 4.25%-4.50% in May’s meeting is 87.1%. For June’s meeting, the odds for borrowing costs being lower stand at 65.5%.
- The US 10-year yield trades around 4.31%, looking for direction with some small safe haven inflow.
US Dollar Index Technical Analysis: Michigan inflation underlines concern
The US Dollar Index (DXY) has been roughly consolidating since that seismic drop at the start of March. Slowly but surely, some small unwinding of that big move lower is starting to unfold. Look for a synchronized move, with Gold paring back gains and the rate differential between the US and other countries widening again, for a comeback of the DXY to 105.00/106.00.
With the weekly close above 104.00 last week, a return to the 105.00 round level could still occur in the coming days, with the 200-day Simple Moving Average (SMA) converging at that point and reinforcing this area as a strong resistance at 104.95. Once broken through that zone, a string of pivotal levels, such as 105.53 and 105.89, could limit the upward momentum.
On the downside, the 104.00 round level is the first nearby support after a successful bounce on Tuesday. If that level does not hold, the DXY risks falling back into that March range between 104.00 and 103.00. Once the lower end at 103.00 gives way, watch out for 101.90 on the downside.
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.
