USD/CHF eases from 0.8000 with investors bracing for US PCE Inflation
- The US Dollar is trimming gains on cautious markets and retreats from highs above 0.8000.
- A raft of better-than-expected US macroeconomic figures dampened hopes of Fed easing on Thursday.
- Federal Reserve policymakers maintain wide divergences on the near-term path for monetary policy.
The US Dollar is trimming previous gains in the early European session on Friday, and the USD/CHF has pulled back from three-week highs above 0.8000, yet with its immediate bullish trend intact, and downside attempts contained at 0.7990 for now.
The Dollar took a boost on Thursday by a stream of better-than expected US Data, which eased concerns about an economic slowdown and forced investors to reassess their hopes of a steep Fed easing cycle.
Upbeat US data boosted the US Dollar on Thursday
Data from the Commerce Department showed that the US Economy grew at a 3.8% annual rate in the second quarter, up from previous estimations of a 3.3% growth and a significant rebound after the first quarter’s 0.5% contraction.
The upbeat GDP data came alongside an unexpected decline in weekly jobless claims, which fell to their lowest levels in nearly two months, and a solid recovery of Durable Goods Orders in August. Investors were cheered by the improving outlook for the labour market and business investment, and the USD rose across the board.
Meanwhile, Fed speakers continued showing their divergences. San Francisco Fed President, Mary Daly, reiterated the need to ease monetary policy further in order to support employment, while the Chicago Fed president warned about aggressive rate cuts, and Fed Miran, Trump's pick to the committee, kept pressuring for a half-point cut at October’s meeting.
Against that backdrop, investors are awaiting the US PCE Prices Index release, due later today, for further insight into the bank’s forward guidance. The market consensus anticipates a moderate uptick in headline inflation to 2.7% in August from 2.5% in July, with the core inflation steady at 2.9%.
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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