US Dollar jumps as COP28 headlines are not welcomed by markets
- The US Dollar is up near 1% against the Japanese Yen.
- Traders will keep their powder dry towards FOMC on Wednesday.
- The US Dollar Index holds above 104 and has more room to go higher.
The US Dollar (USD) is steady in the green on Monday at the last week of normal trading for 2023. Some volatility picks up in the commodity complex as headlines are being issued that a COP28 agreement is on the table after host Saudi Arabia objected to “phase out” fossil fuels, and rather wanted to see a “reduction of consumption”. Meanwhile traders are brushing off the recent US Jobs Reports with Central Bank Futures now pointing to the European Central Bank (ECB) to be the first to cut in the first quarter of 2024, before the US Federal Reserve (Fed) will in the second quarter of 2024.
On the economic front, besides CPI on Tuesday, traders will mainly look forward to Wednesday when the Fed will kick off ahead of Super Thursday, when no less than three major central banks will issue their last monetary policy for 2023 (four with Fed included).
Daily digest: COP28 headlines add to Greenback strenght
- Several new agencies are reporting that an agreement has been drafted for all countries to agree upon after Saudi Arabia, which was the host this year, asked to redact the wording “phase out” rather to “reduce consumption” of fossil fuels.
- Still very far away, though for the US Presidential elections: former US President Donald Trump is leading the Republican Primary elections.
- A possible main driver for the sudden backtracking on changing its monetary policy at the BoJ, could have come with the drop of 13.6% year-on-year in Machine Tool Orders for Japan.
- Meanwhile Chinese markets are trembling as deflation fears are soaring. With a big focus on central banks this week, the European Central Bank could be facing a similar issue as inflation is sinking very rapidly in the region and the ECB already guided markets that it will not cut quick.
- The US Treasury is the main driver this Monday in the economic calendar with no less than four debt issuances.
- Near 16:30 GMT both a 3-month and a 6-month bill will be auctioned.
- At 18:00 GMT a 10-year and a 3-year note will be allocated.
- Equites are flying in Asia after the statement from the BoJ. Japan has closed its Nikkei up 1.50% and the Topix at 1.47%. The already closed Hang Seng was able to erase an early 1.6% loss to close this Monday up 0.5%. European equities are not sure what to make off all these messages out of Asia and are flat for this Monday, together with US futures.
- The CME Group’s FedWatch Tool shows that markets are pricing in a 97.7% chance that the Federal Reserve will keep interest rates unchanged at its meeting next week.
- The benchmark 10-year US Treasury Note trades near 4.25%, a substantial leg higher than last week. The recent US Jobs Report from last Friday revealed a persistent uptick in wages and another drop in unemployment, which opens the risk for persistent inflation.
US Dollar Index technical analysis: DXY roars at start Monday
The US Dollar is gearing up for a comeback in this last trading week of the year under normal trading regime. This means that the last volatile moves in the Greenback and its US Dollar Index (DXY) will be unfolding this week. From a pure technical point of view, the DXY looks set to end this year near 105.
The DXY is recouping losses against the Japanese Yen, one of its main constituents, and is up by 1% in the USD/JPY pair. The DXY trades above 104 and would attract more volume if it was able to break above the high of Friday at 104.26. Once from there, the 100-day Simple Moving Average (SMA) near 104.55 looks very appealing to head toward prior to ahead of Wednesday’s Fed meeting.
To the downside, the 200-day SMA has done a tremendous job in supporting the DXY with buyers coming in below 103.56 and pushing it back towards that same level near the US closing bell. If it fails this week, the lows of November near 102.46 is a level to watch. More downside pressure could bring into view the 100 marker, in a case where US yields sink below 4%.
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.