US Dollar inches higher in US session despite further softening data

  • The US Dollar underwent a hefty correction on Wednesday after the US CPI release pushed the narrative back to disinflation. 
  • Thursday’s data is not really helping with Continuing Jobless Claims jumping higher to nearly 1.8 million for this week.
  • The US Dollar Index flirts with a 104.00 break to the downside.

The US Dollar (USD) is holding on to small gains on Thursday after undergoing a firm depreciation after the latest Consumer Price Index (CPI) showed the disinflationary trend resumed in April. Pieces of the puzzle are starting to fall into place with the recent string of data pointing to some easing on all fronts in the economy, and the softer CPI was the cherry on the cake. Markets responded to evidence of declining inflation popping the champagne bottle, with the S&P 500 reaching new all time highs. 

However, Federal Reserve Bank of Chicago President Austan Goolsbee and Federal Reserve Bank of Minneapolis President Neel Kashkari called for keeping rates steady for a while longer, warning that market expectations about interest-rate cuts might swing too far. 

On the economic data front, the  weekly Initial Jobless Claims is now out of the way, alongside the Philadelphia Fed Manufacturing Survey for May. The Industrial Production for the US did not make a good performance when compared to Europe and Japan. Where both nations see an uptick in their Industrial Production, the US sees it falling flat to 0% and flirting with a contraction. 

Daily digest market movers: Industrial Production is standing still

  • Thursday started with a batch of housing, employment and prices data:
    • Building Permits went from 1.467 million to 1.440 million in March. 
    • Housing Starts went from 1.287 million to 1.360 million.
    • Weekly Jobless Claims came in mixed for once:
      • Initial Jobless Claims came in stronger at 222,000, lower than the 232,000 from last week.
      • Continuing Claims though picked up to 1.794 million, from 1.781 million last week.
    • The import/export Price Index for April will come in as well.
    • The Philadelphia Fed Manufacturing Survey for May slips away from 15.5 to a slim 4.5
  • Industrial Production and Capacity Utilization came in with Capacity at 78.4%, from 78.5% earlier. So nothing concerning there, though Industrial Production has come to a halt with 0% against 0.1% last month. 
  • Markets can digest all the above data before a slew of Fed officials are set to take the stage:
    • Federal Reserve Vice Chair for Supervision Michael Barr will testify before the US Senate Committee on Banking. 
    • Federal Reserve Bank of Philadelphia President Patrick Harker will speak on the economic impact of higher education and health care.
    • Federal Reserve Bank of Cleveland President Loretta Mester will participate in a luncheon at the Wayne Economic Development Council.
    • Federal Reserve Bank of Atlanta President Raphael Bostic participates in a moderated conversation about the US economic outlook at an event organized by the Jacksonville Business Journal.
    • All speakers this Thursday are Federal Open Market Committee (FOMC) voters, except for Fed’s Harker. 
  • The Qatar World Economic Forum started on Tuesday morning. Headlines from world leaders may come out throughout the week.
  • US equity futures are starting to wobble just ahead of the US Opening Bell and are giving up earlier small gains. 
  • The CME Fedwatch Tool suggests a 91.6% probability that June will still see no change to the Federal Reserve’s fed fund rate. Odds have changed for September with the tool showing a 51.4% chance that rates will be 25 basis points lower than current levels.
  • The benchmark 10-year US Treasury Note trades around 4.35%, off the lowest level for this month.

US Dollar Index Technical Analysis: Manufacturing and Industrial Production are hurting

The US Dollar Index (DXY) has taken out several important support in its downward trajectory on Wednesday. Although some support comes in, several rejection levels now can emerge and trigger another violent sell-off. A crucial level to keep an eye on is 103.83, the 55-week Simple Moving Average (SMA), because if it is broken it would open room for the DXY to sink to 100.00.

On the upside, several levels need to be regained again after Wednesday’s firm correction. The first is the 55-day SMA at 104.68, together with a pivotal level at 104.60. The next step up will be 105.12 and 105.52 in case the DXY has room to recover further. 

On the downside, the 100-day SMA around 104.11  is the last man standing to support the decline. Once that snaps, a bit of an air pocket is placed between 104.11 and 103.00. Should US Dollar outflows persist, the low of March at 102.35 and the low from January at 100.61 are levels to keep into consideration.  

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.

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