US Dollar extends gains following hot CPI data
- Core and Headline CPI rose higher than expected in February.
- Despite higher inflation, weak labor market data reported last Friday would seem to limit the USD’s gains.
- Expectations still point toward the interest rate easing cycle starting in June.
The US Dollar Index (DXY) is currently trading slightly higher at 103.05. Despite the report of hot US Consumer Price Index (CPI) figures, the index stands near its December lows.
After The US labor market showed mixed figures for February, the hot CPI figures failed to trigger major changes in expectations. Markets still expect 75 bps of easing in 2024 by the Federal Reserve (Fed) starting in June.
Daily digest market movers: DXY gains ground on hot CPI figures
- In February, US inflation, measured by the Consumer Price Index (CPI), rose by 3.2% on a yearly basis vs the rise of 3.1% in January.
- The Annual Core CPI, which excludes volatile food and energy prices, also saw an increase, rising to 3.8% in February. However, this was below the January increase of 3.9%.
- US Treasury bond yields are climbing with the 2-year yield at 4.60%, the 5-year yield at 4.14%, and the 10-year yield at 4.15%.
DXY technical analysis: DXY bulls step in, outlook still negative
The technical outlook shows an escalating bullish momentum. The continuous escalation highlighted by the Relative Strength Index (RSI) portrays a more pronounced buying momentum despite it being in negative territory, indicative of a potential bullish market reversal. This in combination with the decreasing red bars of the Moving Average Convergence Divergence (MACD) suggests that the selling pressure is marginally declining.
However, the dynamics change when viewed through the lens of the larger context, where the index is still under the 20, 100, and 200-day Simple Moving Averages (SMAs). This placement reflects that bears have been exhaustively active in market dominance, exerting sustained downward pressure on the DXY, which took the Index to December lows.
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.