Published: Friday, May 24, 2024
The US Dollar Index is currently trading at 104.7. This index has experienced some losses, despite positive economic indicators. The US has reported strong domestic economic indicators this week. These include the S&P Global preliminary May PMIs, as well as durable goods orders and Jobless Claims data. This suggests that the US Dollar could continue to recover. The DXY Index is still facing resistance at the Simple Moving Average of 20 days and feeling the effects from selling pressure.
The Fed’s cautious stance will prevent any further decline as the US economy continues to show robust indicators. The Fed’s preferred inflation gauge, Personal Consumption Spending (PCE), will be released next week. This could change the messaging of the central banks.
DXY is a market mover in the Daily Digest: Despite signs of economic recovery in the US, DXY still sees red.
Orders for durable goods in the US rose by 0.7% in March after being revised sharply down to 0.8%. The April reading was higher than the market expectations, which were for a decline of 0.8%.
New orders, excluding transportation, increased by 0.4%. Defense aside, the new orders were almost unchanged.
Fed is still wary of premature easing, with Fed members suggesting that the policy rate limit will continue for an extended period. The market probabilities of a rate reduction at the next meetings are approximately 50% in September, 85% in Novembre and December.
DXY technical Analysis: DXY faces resistance at the 20-day SMA
The technical outlook of the DXY paints a confusing picture. The Relative Strength Index is sloping down in negative territory and indicating that a selling trend is underway. This slope indicates that bears are gaining the upper hand on a short-term basis. Moving Average Convergence Divergence displays flat red bars which indicate constant buying pressure. This adds more color to a bearish narrative.
The DXY, despite its struggles, is still above the SMAs of 100 and 200 days. This position is above the long-term averages and indicates a bullish bias. As long as the SMA is below the 20-day SMA the short-term outlook remains red.
Inflation FAQs
Inflation is the increase in price of a representative set of goods and/or services. Headline inflation is expressed in percentages on a monthly (MoM), and year-onyear (YoY), basis. Core inflation excludes volatile items such as fuel and food, which fluctuate due to geopolitical factors and seasonality. Core inflation is what economists are focused on. It is also the target level for central banks who have a mandate to keep inflation under control, usually at around 2%.
The Consumer Price Index measures the changes in prices over time of a certain basket of goods and/or services. The change in prices is expressed as a percentile on a monthly (MoM), and a year-onyear (YoY), basis. The central bank targets the Core CPI because it excludes volatile inputs such as food and fuel. If Core CPI is above 2%, interest rates are usually higher. The opposite happens when it drops below 2%. Higher interest rates are generally positive for currencies, so higher inflation will usually result in a stronger currency. When inflation drops, the opposite occurs.
It may seem contrary to logic, but high inflation in one country can increase the value of that currency. The opposite is true for low inflation. The central bank raises interest rates in order to combat higher inflation. This attracts more capital from global investors who are looking for a profitable place to park their funds.
Gold used to be the safe haven asset that investors bought in times when inflation was high because it maintained its value. While this still happens occasionally, most investors do not buy Gold in these times. When inflation is high central banks raise interest rates in order to combat it. Gold is negatively affected by higher interest rates because they make it more expensive to hold Gold compared to an interest-bearing investment or a cash account. Lower inflation is a positive factor for Gold, as it tends to bring down interest rates, making the metal more attractive.
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