US Dollar snaps above important cap with PCE on the docket
- The US Dollar has struck a double-whammy with positive US data and a disappointing ECB on Thursday.
- Traders brace for the Fed’s preferred inflation gauge – the Personal Consumption Expenditures.
- The US Dollar Index breaks out of a range and could finally be able to trade away from it.
The US Dollar (USD) pops against most major peers painting charts green this Friday in the aftermath of the US tripod print of US Gross Domestic Product - Durable Goods - Jobless Claims on Thursday. At that same time the European Central Bank (ECB) disappointed the market by not sticking out its neck and providing forward guidance to the markets on rate cuts. Traders were quick to punish the Euro and favor the Greenback on the back of these events.
On the economic front, traders are gearing up for the US Federal Reserve’s (Fed) preferred Personal Consumption Expenditures (PCE) release. Expectations are for a small uptick in all elements on the monthly base, while the yearly bases are expected to come down. Any decline in these numbers will be attributed to US Dollar weakness in the pipeline.
Daily digest market movers: Fed’s barometer set to hit markets
- Sweden is set to join NATO once Hungary ratifies the agreement in parliament after Turkey already did earlier this week.
- US Treasury Secretary Janet Yellen said during an interview with ABC that she sees “no reason” for a recession this year.
- The European Central Bank will release its official rate decision and guiding letter around 13:15 GMT. A press release with Q&A by Christina Lagarde will follow suit near 14:45.
- The Personal Consumption Expenditures (PCE) data for December is due to be released at 13:30 GMT:
- Monthly Headline PCE is expected to jump from -0.1% to 0.2%.
- Yearly Headline PCE is seen heading from 2.6% to an unchanged 2.6%.
- Monthly Core PCE is heading from 0.1% to 0.2%.
- Yearly Core PCE should shrink from 3.2% to 3.0%.
- Personal Income is seen heading from 0.4% to 0.3%.
- Personal Spending will head from 0.2% to 0.4%.
- Last data point for this Friday comes near 15:00 with Pending Home Sales, expected to head from 0% to 1.5% for December versus November.
- Equity markets are in the red this last day of the week with in Asia all indices down over 1% for Japan and China. Mainland Europe is taking over the sour mood and is trading down near 0.50% halfway through the European session. US Futures are in a similar decline with the Nasdaq leading the charge with Tesla and Intel dragging down the index.
- The CME Group’s FedWatch Tool shows that markets are pricing in a 97.4% possibility for an unchanged rate decision on January 31, with a slim 2.6% chance of a cut.
- The benchmark 10-year US Treasury Note trades near 4.10%, which is a touch lower than where it was earlier this week.
US Dollar Index Technical Analysis: Is this the one or another false break?
The US Dollar Index (DXY) is having a copy-paste moment from earlier this week of last week’s performance. Again the DXY is able to snap above the 200-day Simple Moving Average (SMA) near 103.51, though could face headwinds from the PCE print later this Friday. If the DXY is unable to close off this Friday or this week for that matter, above the 200-day SMA, expect to see another downfall with a test at 103 for a break lower.
In case the DXY would be able to run further away from the 200-day SMA, more upside is in the tank. Look for 104.41 as the first resistance level on the upside, in the form of the 100-day SMA. If that gets breached as well, nothing will hold the DXY from heading to either 105.88 or 107.20 – the high of September.
With the repetition of another break above the 200-day SMA, yet again, a bull trap could get formed once prices would start sliding below the same moving average. This would see a long squeeze with US Dollar bulls being forced to start selling around 103.14 at the 55-day SMA. Once below it, the downturn is open towards 102.00.
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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