US Dollar loses ground as investors remain overly confident on a September cut
- The US Dollar measured by the DXY Index plunges to a seven-month low amidst declining Treasury yields.
- Investors turn their gaze toward Powell's forthcoming address at Jackson Hole for further cues on subsequent Fed rate cuts.
- A September cut is almost a done deal, based on interest rate bets.
The US Dollar, benchmarked by the US Dollar Index (DXY), recorded a seven-month low, in correspondence with a falling trend in Treasury yields and intense dovish bets on the Federal Reserve (Fed). In response to the circulating sentiment built around Chair Jerome Powell's forthcoming statements at the Jackson Hole assembly that begins on Thursday, market investors are focusing on potential disclosures regarding future Fed rate cuts.
Despite this evolution, the US economic outlook remains resilient. Comprehensive scrutiny of recent data consolidates the fact that the US economy still persists in growing above its trend. This indicates a recurrent market narrative inclined toward the anticipation of aggressive loosening in monetary policy.
Daily digest of market movers: DXY Index reaches seven-month low ahead of Jackson Hole Symposium
- At the start of the week, the DXY Index has been recording a consistent fall, now at its lowest mark in seven months against all major global currencies.
- The US economy, in contrast, showcases stability with a benign rate of inflation and solid domestic demand.
- The marketplace, notwithstanding, speculates an imminent dovish spree by the Fed starting in September. Yet the non-aligned reality of the US economy and a hawkish stance from the Fed brings forth a potential resurgence opportunity for the DXY Index in future trade sessions. Jerome Powell’s words at the Jackson Hole Symposium will be key.
- While the odds of a sharp 50 bps cut in September have come down, the market still anticipates nearly 100 bps of total easing by year-end.
- This also extends to 175-200 bps of easing over the impending 12 months.
DXY technical analysis: Bearish dominance persists as DXY Index exits sideways movement
Despite continuous efforts by the buyers, the DXY’s technical outlook has assumed a clearer bearish shade. The DXY Index came out of its sideways trading phase in the band of 102.50-103.30, which is a likely windfall for sellers. The momentum-oriented Relative Strength Index (RSI) took a major hit, falling into the oversold terrain with the Moving Average Convergence Divergence (MACD) manifesting increasing red bars. This firmly suggests an entrenched bearish dominance toward the DXY.
Support Levels: 101.50, 101.30, 101.20
Resistance Levels: 102.00, 102.50, 103.00
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.