US Dollar Price Forecast: USD sees green while markets remain stubborn and challenge the Fed signs
- Despite market concerns, the US economy continues to grow above trend.
- The market anticipates 100 bps of Fed easing by year's end.
- Wednesday won’t have any economic highlights, market sentiment to dictate the pace.
The US Dollar, measured by the DXY index, remained well-supported during Wednesday's session, driven primarily by selling pressure on the Japanese Yen following a cautious outlook by the Bank of Japan. The USD/JPY pair saw a significant 2% surge throughout the day, contributing to the DXY index's hold above the 103.00 point. While there won’t be any economic data highlights on Wednesday, caution and risk perception might dictate the pace of the USD.
While markets contended with potential implications of further easing from the Fed, the US economy continues to perform solidly. Growth remains above trend, suggesting a market caught up in overly aggressive easing forecasts.
Daily digest market movers: US economic performance calls into question market's aggressive easing bets
- The market remains mispriced on the extent of the Fed's easing, still fully pricing in 100 bps by year-end, a decrease from Monday's 125 bps expectations.
- The market now anticipates a near 80% likelihood of a 50 bps reduction in September, down from Monday's 90%
- Overall easing over the next 12 months is now expected between 175 to 200 bps, a reduction from the over 200 bps predicted on Monday
On the other hand, a severe US economic recession would need to materialize for the current easing path to remain feasible. Until more data is available, it remains challenging to counteract the prevailing dovish market narrative.
DXY technical outlook: Indications of improvement seen, bears take a breather
The DXY index's technical outlook is improving. Both the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) are currently in the red, with the RSI below the 50-point level but pointing upwards, and the MACD continuing to print lower red bars.
However, a firmly bearish outlook is confirmed by the index remaining below the 20, 100 and 200-day Simple Moving Averages (SMAs).
With this in mind, current support stands at 103.00, 102.50 and 102.20 with resistance noted at 103.50 and 104.00.
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.