US Dollar soft ahead of CPI data, Powell testifies

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  • US Dollar, down 0.80% last week, now at lowest level since mid-June.
  • Anticipation builds with the upcoming release of the June inflation figures and Fed talks.
  • Market is pricing in less than 10% odds of a cut in July and around 80% in September.

The US Dollar continues to struggle amid signs of disinflation in the US economy, fostering confidence in a potential September rate cut from the Federal Reserve (Fed) among market participants. This week, Fed Chair Jerome Powell and other governors’ words might bail out the USD and limit the losses if they remain cautious.

Despite the trailing softness in the US indicators, Fed officials are still reluctant to embrace cuts, opting to remain data-dependent and might continue asking for patience.

Daily digest market movers: US Dollar continues soft ahead of CPI and Powell’s testimony

  • Among the most noteworthy events of the week are Chairman Powell’s Semiannual Monetary Policy Report to Congress, multiple Fed members speaking, and the release of inflation data for June.
  • On Thursday, the headline Consumer Price Index (CPI) is expected to have dropped two ticks to 3.1% YoY, while the core figure is expected to remain steady at 3.4% YoY.
  • As for now, the market predicts less than a 10% chance of a rate cut at the July 31 meeting, with the odds shooting to around 80% for September.

DXY technical outlook: DXY’s struggle persists as it resides below 20-day SMA

Following the DXY’s slip below the 20-day Simple Moving Average (SMA) and shrinking by 0.80% last week, the technical outlook has shifted for the worst. Both the Relative Strength Index (RSI) and the Moving Average Convergence Divergence (MACD) have slumped into negative territory.

Meanwhile, the 104.70 zone, marked by the 200-day SMA, continues to provide strong support. If the selling pressure continues, the 104.50 and 104.30 areas could potentially put a stop to further losses.

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.