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US Dollar stands soft as investors await drivers

  • Strong Consumer Confidence and Housing sector data didn’t trigger movements in the USD.
  • Next highlight will be Wednesday’s Fed’s Beige Book report where markets will get a clearer outlook on the US economy’s health.
  • PCE and GDP revisions are the week’s highlights.

The US Dollar Index (DXY) is slowly declining as US markets prepare for the release of economic data this week. On Tuesday, the US reported strong Confidence and Housing sector data, but the USD remains soft ahead of high-tier data to be released during the week.

Despite some mild losses and the markets continuing to give up hopes for an interest rate cut in June or July, the resilient US economy allows the Fed to maintain its cautious stance, which cushions the US Dollar. Thursday’s Gross Domestic Product (GDP) and Personal Consumption Expenditures (PCE) will set the pace for bets on upcoming Federal Reserve (Fed) decisions. The current odds predict a first cut in September.

Daily digest market movers: DXY experiences mild losses despite strong low-tier data, focus on Fed’s cautious stance

  • The Conference Board’s Consumer Confidence has come out stronger than expected at 102, versus the anticipated 96.
  • Furthermore, the S&P/Case-Shiller Home Price Indices beat expectations with 7.4% YoY print in March.
  • April’s Personal Consumption Expenditure (PCE), the Fed’s preferred gauge of inflation, is seen remaining at 2.7% YoY for headline inflation and 2.8% for core. The Q1 GDP is expected to be revised higher.
  • Outcome of this data will continue to shape expectations on the easing cycle, dictating the pace of the USD.

DXY technical analysis: Greenback witnesses sustained selling pressure and bear command

The daily chart indicators continue to show mounting steady bearish momentum in the DXY. The Relative Strength Index (RSI) maintains a negative slope and remains in a selling zone, indicating prevailing selling pressure. This is even more evident with the red bars of the Moving Average Convergence Divergence (MACD) indicator that showcase bearish momentum.

In terms of Simple Moving Averages (SMAs), despite the DXY operating below the 20-day SMA and displaying bears’ short-term efficiency, it continues to remain above the 100 and 200-day SMAs, suggesting bulls have relative strength over a more extended timeline.

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.