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US Dollar Index finally comes back to live after second GDP reading reveals surprise uptick in inflation segments

  • The US Dollar books broad gains after the second reading of the US GDP release.
  • Traders see the inflation component pick up and catch markets by surprise.
  • The US Dollar Index (DXY) breaks above 107.00 and stretches higher.

The US Dollar Index (DXY), which tracks the performance of the US Dollar (USD) against six major currencies, is rallying and breaks above 107.00 at the time of writing on Thursday after some important US data releases. The DXY initially this Thursday was receiving a bit of a tailwind from the Gold and US yields sell-off. The move came after United States (US) President Donald Trump spoke about tariffs during his first real cabinet meeting on Wednesday, leaving reports puzzled on what levies would be imposed to which countries and the timing. 

The US President added that Europe must brace as well for a 25% tariff on autos and other things, but he did not specify when these levies would come into effect. Trump lashed out at the bloc saying it was created only “to screw the United States”. 

In the meantime, the second US Gross Domestic Product reading (GDP) for the fourth quarter has turn that mild tailwind into a big one. The headline GDP reading came in higher, which as a surprise, while the inflation elements were turning hot as well. This just one day ahead of the Federal Reserve’s (Fed) preferred inflation gauge, the Personal Consumption Expenditures reading (PCE), inflation is back on the agenda. 

Daily digest market movers: Surprises all around

  • Overnight, several US officials had to issue additional statements on the current timetable for US tariffs being imposed after the US President contradicted himself multiple times on what kind of tariffs would take place, when and for which countries. The troubled communication from Trump himself cast a fog over the tariff element, triggering a steep selloff in Gold (which was the tariff safe haven until now), Bloomberg reports. 
  • The main data elements for this Thursday have been released:
    • The second reading of the US Gross Domestic Product (GDP) for the fourth quarter of 2024:
      • The GDP annualized came in as expected at 2.3%.
      • The headline preliminary Personal Consumption Expenditures (PCE) component came in higher at 2.4%, beating the 2.3% with the core number turning red hot at 2.7%, surpassing the 2.5%.
    • US Initial Jobless Claims for the week ending on February 21 cme in higher at 224,000 with specific numbers for Washington D.C. on the uprising. Clearly the DOGE effect is playing out here. The US Continuing Claims for the week ending on February 14 fell to 1.862 million, below the expected 1.870 million people and below the previous 1.869 million people. 
  • At 16:00 GMT, the US Kansas Fed Manufacturing Activity Index for February will be released. No forecast is available with the previous reading at -5.
  • Five US Federal Reserve (Fed) officials are set to speak:
    • At 15:00 GMT, Federal Reserve Vice Chair for Supervision Michael Barr delivers a speech on “Novel Activity Supervision” at the Bank and Fintech Arrangements TechSprint event in Washington, D.C.
    • At 16:45 GMT, Federal Reserve Governor Michelle Bowman gives a speech focusing on Community Banking at the Fort Hays State University Robbins Banking Institute Lecture Series in Hays, Kansas.
    • At 18:00 GMT, Federal Reserve Bank of Richmond President Thomas Barkin will speak about “Inflation then and now”, in Fayetteville Cumberland Economic Development, North Carolina.
    • Just 15 minutes later, at 18:15 GMT, Federal Reserve Bank of Cleveland President and Chief Executive Officer Beth M. Hammack participates in the “2025 Bank Regulation Research Conference” at the Columbia University/Bank Policy Institute, New York.
    • Rounding up at 20:15 GMT Federal Reserve Bank of Philadelphia President Patrick T. Harker will discuss the economic outlook at the Lyons Economic Forecast, presented by the University of Delaware’s Center for Economic Education and Entrepreneurship, in Newark, Delaware.
  • Equities are rolling over in both Europe and the US with all indices down near or over 1%.
  • The CME Fedwatch Tool projects a 33.0% chance that the interest rates will remain at the current range in June, with the rest showing a possible rate cut. 
  • The US 10-year yield trades around 4.28%, not far from its low for this week aat 4.24%, nd again further down from last week’s high at 4.574%.

US Dollar Index Technical Analysis: Finally it is alive

The US Dollar Index (DXY) is not really thriving after President Trump’s overnight comments on tariffs. Again, it looks like the US Dollar cannot enjoy a very light part of the current market flow, offset largely by the continuous drop in US yields. Look out for inflation-sensitive data that might counter the current Federal Reserve’s rate cut expectations, pushing US yields back higher and triggering a stronger Greenback. 

On the upside, the 100-day Simple Moving Average (SMA) could limit bulls buying the Greenback near 106.75. From there, the next leg could go up to 107.35, a pivotal support from December 2024 and January 2025. In case US yields recover and head higher again, even 107.95 (55-day SMA) could be tested. 

On the downside, if the DXY fails to hold above the 106.52 level, another leg lower might be needed to entice Dollar bulls to reenter near 105.89 or even 105.33.

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.