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US Dollar eases ahead of CPI with markets ignoring Powell’s speech

  • The US Dollar falls out of bed on Wednesday ahead of US CPI release. 
  • Downward US PPI revisions for March and speculation over China supporting its property sector trigger a wave of Dollar weakness. 
  • The US Dollar Index drops below 105.00 and sets sail to mid-104.00 range.

The US Dollar (USD) eases on Wednesday and falls below 105.00 ahead of the highly anticipated US Consumer Price Index (CPI) release for April. Overnight, US Federal Reserve  (Fed) Chairman Jerome Powell delivered a speech which seemed to prepare markets for the chance that the initial interest rate cut would only come after the summer or even later.

Markets ignored these comments and likely focused solely on the revisions in the Producer Price Index (PPI) numbers, which were all to the downside. Additionally, news that the Chinese government is forming a rescue package to bail out its plagued real estate sector made headlines on Wednesday, seems to put much more pressure on the US Dollar Index (DXY). 

On the economic front, the CPI release will take up most of the attention, though Retail Sales data for April are to be released at the same time. So traders can expect volatility to pick up, and should both numbers be mixed or oppose one another, choppy price action is to be expected. Traders can afterwards hear from Federal Reserve Bank of Minneapolis President Neel Kashkari and Federal Reserve Governor Michelle Bowman for any guidance on how to read the inflation release. 

Daily digest market movers: Pressure is on for CPI

  • At 11:00 GMT, the Mortgage Bankers Association has released its Mortgage Applications index for the week ending May 10. The index increased by 2.6% the previous week and came in at 0.5% this week.
  • At 12:30 GMT, the US economic calendar will include the US CPI and the Retail Sales data for April:
    • April CPI numbers:
      • Monthly Headline CPI is expected to increase at the same pace as the March reading of 0.4%.
      • Yearly Headline CPI is expected to rise 3.4%  from 3.5% in March.
      • Monthly core CPI is expected to rise by 0.3% in April from 0.4% the previous month.
      • Yearly core CPI is expected to rise 3.6%  from 3.8% in March.
    • April Retail Sales:
      • Monthly Retail Sales are expected to rise 0.4% in April from 0.7% in March.
      • Retail Sales, excluding cars and transportation, are expected to increase by 0.2% from 1.1% the previous month.
      • Note that the revisions could be more market-movers than the actual numbers. 
  • At 14:00 GMT, the National Association of Home Builders Housing Market Index for May will be released, and is expected to remain stable at 51.
  • Business Inventories for March are also to be released at 14:00 GMT and are expected to head to -0.1% from 0.4%.
  • Federal Reserve Bank of Minneapolis President Neel Kashkari will speak at 16:00 GMT. He is a non-voter for this year.
  • Federal Reserve Governor Michelle Bowman will take the stage around 19:20 GMT. 
  • The Qatar World Economic Forum started on Tuesday morning. Headlines from world leaders may come out throughout the week.
  • Equities in the US outperformed on Tuesday night at the closing bell, though are trading flat ahead of the start of the US session. European equities are mildly in the green. 
  • The CME Fedwatch Tool suggests a 91.3% probability that June will still see no change to the Federal Reserve’s fed fund rate. Odds of a rate cut in July are also out of the cards, while for September the tool shows a 49.7% chance that rates will be 25 basis points lower than current levels.
  • The benchmark 10-year US Treasury Note trades around 4.42%, the lowest level for this week.

US Dollar Index Technical Analysis: Testing Moving Averages

The US Dollar Index (DXY) eases and retraces below the important 105.00 level on Wednesday. All eyes are on the US CPI data, as most market participants now expect this print to confirm that disinflation is still on track. The risk is that any beat on estimates could trigger another shock move in markets with the DXY as biggest winner as expectations show a slowdown in inflation pressures. 

On the upside, 105.52 (a pivotal level since April 11) must be recovered, ideally through a daily close above this level, before targeting the April 16 high at 106.52. Further up and above the 107.00 round level, the DXY index could meet resistance at 107.35, the October 3 high. 

On the downside, the 55-day and the 200-day Simple Moving Averages (SMAs), currently at 104.69 and 104.34 respectively, have already provided ample support recently. If those levels are unable to hold, the 100-day SMA near 104.09 is the next best candidate. 

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.