- DXY Index is neutral, trading at 104.25, setting up for a quiet weekly start.
- Weaker data drives Fed officials’ cautious stance, and financial conditions are improving.
- Markets continue to bet on an easing cycle starting in September, FOMC minutes on Wednesday will be key.
The US Dollar Index (DXY) begins the week on a quiet note, trading at 104.25, registering negligible changes despite the recent soft performances in data. The Federal Reserve (Fed) still showcases caution regarding premature easing as financial conditions continue to loosen.
The US economy exhibits signs of unyielding stability, despite recent data revealing some underperformance. The Fed, nonetheless, remains vigilant, hesitant to resort to premature easing as the financial conditions persistently ease. Inflation and Retail sales data from April disappointed last week, and markets will set their sight on S&P data later this week to gain more insights into the US economy’s health.
Daily digest market movers: US Dollar holds its ground, markets await drivers
- Fed officials remain cautious in terms of a timeline for cutting interest rates, incoming data will set the timing of the easing cycle.
- Odds of a cut in June and July still remain low, so investors are delaying the first cut to September.
- Treasury bond yields are rising with the 2-year yield seen at 4.83%, the 5-year yield at 4.44%, and the 10-year yield at 4.42%.
DXY technical analysis: DXY wrestles with momentum as both bulls and bears battle for dominance
The indicators on the daily chart reflect an undecided market that awaits drivers. The flat position of the Relative Strength Index (RSI) in negative territory discloses the conflict within the market, detailing the struggle between buyers and sellers. Moreover, the Moving Average Convergence Divergence (MACD) histogram displaying flat red bars supports this idea of bears trying to wrest control over the short term. However, the stalled nature shows a lack of decisive momentum in either direction, reflecting a market awaiting firm direction.
The Simple Moving Averages (SMAs) partially tell a similar tale. The index trading below the 20-day SMA indicates that bears have recently gained some ground. However, the fact that DXY remains above both the 100 and 200-day SMAs suggests that the longer-term bullish momentum cannot be entirely dismissed.
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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