US Dollar gears up for US inflation release which might determine the move from the Fed next week
- The US Dollar edges lower on Wednesday after markets labelled Harris as the winner of Tuesday’s presidential election debate.
- US CPI data for August is the last point for the Fed to take into account before next week’s decision.
- The US Dollar Index falls back below 101.50 and could extend decline if US inflation comes lower than expected.
The US Dollar (USD) eases a touch on Wednesday, with several news correspondents commenting that Vice President Kamala Harris has won the presidential election debate between her and former US President Donald Trump. The victory is a very small one though, not a landslide at all. Expectations are that Kamala Harris will now gain some points in the polls, though it will still remain a close call towards the November 5 elections.
On the economic data front, the US Consumer Price Index (CPI) release for August will focus all the attention for this week. Markets see this as the last data point for the US Federal Reserve (Fed) and its Federal Open Market Committee (FOMC) to make their interest rate decision next week. A softer CPI release would open the door for a 50 basis point rate cut, while a steady or stronger CPI number might limit the outcome to only a 25 basis point rate cut.
Daily digest market movers: CPI last chance to move needle for Fed decision
- A CNN poll revealed that 63% of the viewers saw Harris as the winner of the presidential election debate, Bloomberg reported.
- At 11:00 GMT, the Mortgage Bankers Association released its weekly Mortgage Applications number for the week ending September 6. Prior week, there was a rise of 1.6%, with this week coming in at 1.4%.
- At 12:30 GMT, the US Consumer Price Index (CPI) for August will be released:
- Monthly Headline CPI inflation is expected to remain stable at 0.2%.
- Yearly Headline CPI inflation is expected to ease to 2.6% from 2.9%.
- Monthly Core CPI inflation should remain at 0.2%.
- Yearly Core CPI inflation is expected to remain at 3.2%.
- At 17:00 GMT, the US Treasury will allocate 10-year notes.
- Equities are struggling, with Asian equities already closing with losses often more than 1% on Wednesday. European equities are in the red, though less than 0.5%. Meanwhile US Futures are down by 0.5% on average.
- The CME Fedwatch Tool shows a 67.0% chance of a 25 basis points (bps) interest rate cut by the Fed on September 18 against a 33.0% chance for a 50 bps cut. For the meeting on November 7, another 25 bps cut (if September is a 25 bps cut) is expected by 27.2%, while there is a 53.2% chance that rates will be 75 bps (25 bps + 50 bps) and a 19.6% probability of rates being 100 (25 bps + 75 bps) basis points lower.
- The US 10-year benchmark rate trades at 3.61%, a fresh 15 month low at levels not seen since mid-June 2023.
US Dollar Index Technical Analysis: One thing is sure, there will be a cut!
The US Dollar Index (DXY) is stuck in a range between 101.90 on the upside to 100.62 on the downside since September began. Markets are still awaiting clarity from US data on whether the Fed’s interest rate cut next week will be a 25 or a 50 basis point. Expect the US CPI release on Wednesday to give some more clarity or even an answer on that question.
The first resistance at 101.90 is getting ready for a second test after its rejection last week. Further up, a steep 1.2% uprising would be needed to get the index to 103.18. The next tranche up is a very misty one, with the 55-day Simple Moving Average (SMA) at 103.40, followed by the 200-day SMA at 103.89, just ahead of the big 104.00 round level.
On the downside, 100.62 (the low from December 28) holds strong and has already made the DXY rebound four times in recent weeks. Should it break, the low from July 14, 2023, at 99.58, will be the ultimate level to look out for. Once that level gives way, early levels from 2023 are coming in near 97.73.
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.