US Dollar tallies a winning week, focus shifts to inflation data
  • DXY Index retreats after the latest string of US data holds onto weekly gains
  • United States NFPs from December were higher than expected, as well as Average Hourly Earnings, while the Unemployment Rate stood at 3.7%.
  • The Services ISM PMI from the same month was disappointing.

The US Dollar (USD), represented by the Dollar Index, is currently trading just above 102.40 with slight losses due to the markets adjusting dovish bets post the release of December’s Nonfarm Payrolls (NFP) and the ISM PMIs. 

From indications in the last 2023 Federal Reserve meeting, a dovish stance was apparent. The Fed expressed comfort with cooling inflation and projected no rate hikes until 2024, suggesting 75 bps of easing. As for now, market predictions hint towards a rate cut in March followed by another in May, and such a position signals a bearish climate for the US Dollar, as lower interest rates might drive liquid capital to higher yield markets.

Daily digest market movers: US Dollar under downward pressure despite strong NFP, ISM PMI weighs

  • The ISM Services PMI for December came in at 50.6, missing the consensus of 52.6 and lower than the previous figure of 52.7.
  • December’s Average Hourly Earnings saw a monthly increase of 0.4%, outpacing the consensus of 0.3% and matching the previous figure.
  • December Unemployment Rate remained steady at 3.7%, lower than the 3.8% expected.
  • The Nonfarm Payrolls report surpassed expectations with the addition of 216,000 jobs, beating the 170,000 job consensus and the previous 173,000 figure.
  • Despite the strong labor figures, markets seem to be weighing in more poor ISM figures and rushed to bet on a less aggressive Fed.
  • Fed predictions suggest no hike is anticipated for the January meeting, with only a 15% probability of a rate cut. The market consensus now points toward the likelihood of rate cuts in both March and May of 2024, with the odds of the easing cycle starting in the third month at 70%.

Technical Analysis: DXY index seller’s momentum resumes as bulls give up

The Relative Strength Index (RSI) is charting a negative slope in the negative territory, suggesting a bearish trend prevalent in the DXY. Selling momentum seems to have a stronger hold, reflecting the downward drift of the RSI.

The Moving Average Convergence Divergence (MACD) is showing rising red bars, implying that negative momentum is gradually escalating, further reinforcing the bearish outlook. 

In regards to the Simple Moving Averages (SMAs), the index is struggling around the 20-day SMA and is still below the longer-term 100, and 200-day SMAs. indicating that on the broader context, the sellers are comfortably in command.

In conclusion, the indicators on the daily chart reflect a dominant bearish force in the short term, amplified by the repeated indication of the bulls losing ground and failing to hold the traction gained in the last session. This suggests there may be more downward movements on the horizon.

Support levels: 102.15 (20-day SMA), 101.80, 101.70.
Resistance levels: 102.50,102.70, 103.00.

Inflation FAQs

What is inflation?

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%.

What is the Consumer Price Index (CPI)?

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.

What is the impact of inflation on foreign exchange?

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.

How does inflation influence the price of Gold?

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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