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US Dollar on crucial point as US inflation could either snap losing streak or print fresh three-month low for the Greenback


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  • US Dollar down against nearly every G10 currency. 
  • The economic calendar takes the spotlight with US inflation numbers this Wednesday.
  • The US Dollar Index continues its slide lower and starts to get in orbit around 101.00.

The US Dollar (USD) is getting ready for the very important US inflation numbers this Wednesday. Traders will be able to see if they are right in sticking to their bets on just one more rate hike from Fed, or if the Fed is right to stick to their guns and go for at least two more hikes as core inflation could remain sticky. While traders and the Fed are playing tug of war, the Greenback is dropping lower yet again in a downtrend for a fifth consecutive day where the US Dollar Index is getting really close to a fresh three-month low.

The economic calendar is bearing a main event this Wednesday with the US Consumer Price Index (CPI) gauge. In all the equivalents on monthly and yearly performances, the core inflation will be the one to watch for any market-moving reactions. Seeing the recent data points in terms of services, expectations are that the core will remain sticky near 5% while any lower number will trigger further US Dollar weakness. 

Daily digest: US Dollar red for fifth day in a row

  • China premier meets major internet companies and vows more support. Meanwhile the China state fund has cut exposure against weak builder firms. 
  • Some mild data to start the day came in at 11:00 GMT with the Mortgage Bankers Association issued the Mortgage Applications for the first week of July. The number of applications jumped from -4.4% to 0.9%.
  • Main event to take place at 12:30 GMT with the US Consumer Price Index (CPI) coming in. The overall CPI is expected to decelerate from 4% to 3.1% on a yearly basis, while the monthly is expected to pick up some pace from 0.1% to 0.3%. Main driver will be the core CPI which is forecast to stick to a 5% rise, coming from 5.3% on a yearly basis, while the monthly core inflation numbers are expected to slide from 0.4% to 0.3%.
  • The estimates for the US core CPI number are between 4.8% and 5.1%. This means that any number below 4.8% will see a substantially weaker US Dollar, while a print above 5.1% will see a substantially stronger USD. A release in between will rather result in a muted and short-lived move in any direction. 
  • Quite a few Fed speakers today: Neel Kashkari of the Ninth District Federal Reserve Bank at Minneapolis will speak at 13:45 GMT on monetary policy and banking solvency. Raphael W. Bostic from the Federal Reserve Bank of Atlanta will speak around 17:00 GMT at the Atlanta’s Fed Payments Forum. To close off the batch of Fed speakers, president of the Federal Reserve Bank of Cleveland Loretta Mester will speak on FedNow at 20:00 GMT. 
  • The US Treasury is set to access the markets as well in order to allocate a 10-year bond auction.  
  • The Japanese Topix heads lower and closes this Wednesday off by -0.67% after Machine Orders sinked into negative territory. China on the contrary was able to again eke out gains above 1%. European equities firmly in the green and US futures are mildly up. 
  • The CME Group FedWatch Tool shows that markets are pricing in a 92.4% chance of a 25 basis points (bps) interest-rate hike on July 26. Chances of a second hike in November are down to 26.7%. It appears that markets are pricing out again the possibility of a second rate hike and presume that the Fed will hike in July for the last time. Markets expect US Fed Chairman Jerome Powell to announce that the pivotal level has been reached at the yearly Jackson-Hole Symposium between August 24 and 26 in Kansas. 
  • The benchmark 10-year US Treasury bond yield trades at 3.94% and is continuing its slide lower from 4.09% last week. Traders are again doubling down on whether there will be more than one rate hike from the Fed. 

US Dollar Index technical analysis: pressure on US Dollar bulls

The US Dollar is in the ropes and does not seem to be able to trigger any turnaround at the moment. For a fifth consecutive day, the US Dollar is losing substantial ground. On Tuesday, it was Asian currencies which were weighing the Greenback, while this Wednesday the US Dollar is losing ground against nearly every major G10 traded currency. This smashes the US Dollar Index (DXY) again to the floor, with the 101 level coming into play, a nearly one-year-low. 

On the upside, look for 102.811 at the 55-day Simple Moving Average (SMA) that will partially re-gain its importance after having been chopped up that much a few weeks ago. Only a few inches above the 55-day SMA, the 100-day SMA comes in at 102.93 and could create a firm area of resistance in between both moving averages. In case the DXY makes its way through that region, the high of July at 103.57 will be the level to watch for a further breakout. 

On the downside, 101.50 has been broken and the US Dollar price action is starting to get into orbit around 101.00. Once that level is breached, expect to see the Greenback printing near one-year-lows against most major pairs. Special notice for 100.75, as that level has been a floor since February 2nd and could open the door for a slide below 100.00 once broken through it. 

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.