- The dollar is trading at three-month highs.
- Markets are digesting the recent US CPI report that spoiled the Fed's planned rate cut schedule.
- The US Dollar Index appears to have stalled above 105 and is experiencing some profit taking.
He US dollar (USD) has dealt a few well-placed blows to the markets with a substantial recovery in the middle of the week, although it does not appear that it will continue this Wednesday before the opening of the US markets. The move followed surprising spikes in US monthly inflation (both headline and core). This, in turn, is causing an earthquake in the markets, causing stocks to plummet, yields to skyrocket and the Dollar to rise against all major currencies.
Regarding economic data, the calendar is semi-empty and offers markets room to digest and recalibrate them. Don't expect much from a single piece of economic data this Wednesday with the mortgage applications survey. Rather, we should pay attention to clues from US Federal Reserve members Austan Goolsbee and Michael Barr, who will give statements and could soften the current impression of inflation with a nuanced message.
Daily summary of market movements: Tuesday's CPI, down
- Several other analysts and banks are dismissing Tuesday's data as something temporary, with the disinflationary path still intact and no substantial rebound in inflation expected.
- Goldman Sachs was quick to report on the US Consumer Price Index (CPI), saying February numbers will be substantially lower and dismissing the current sharp reaction in CPI numbers due to the intense seasonal holiday period. December and January. So, according to Goldman Sachs, it is a mere nosedive.
- North Korea has fired multiple cruise missiles off the east coast.
- The weekly mortgage application index entered into contraction by 2.3%, compared to the positive 3.7% of the previous week.
- Two members of the US Federal Reserve will make comments this Wednesday: Austan Gooldsbee of the Chicago Fed at around 2:30 p.m., and later at around 9:00 p.m., Michael Barr, vice president of the Fed, will speak.
- Stock markets are trying to recover with European stocks slightly in the green. US stock futures rise even more than European ones, with the Nasdaq leading the way, up 0.60%.
- The CME Group's FedWatch tool now focuses on the March 20 meeting. Expectations of a pause are 91.5%, while 8.5% favor a rate cut. Regarding the overweighting of rate cut expectations, the dial has turned from May/June to summer, towards July.
- The 10-year US Treasury benchmark is trading near 4.29%, slightly less than the high reached on Tuesday (4.33%).
Technical Analysis of the Dollar Index: Readjustments to reach the right moment for rate cuts
The Dollar Index (DXY) soared to around 105 following the US CPI data. While it seems very logical that the DXY could now jump above that level, markets have already factored in the data after pushing back Fed rate cut expectations from June to July. It is possible, therefore, that in the coming days this bullish movement will begin to fade in search of support.
The path is open for a jump to 105.00 with 105.12 as key levels to watch. One step further is 105.88, the November 2023 high. Finally, 107.20, the 2023 high, could even re-enter the picture, but that would occur when various inflation measures exceeded forecasts for several weeks in a row.
Support should now be at last week's Monday high, near 104.59. Further down, the 100-day SMA looks quite doubtful near 104.24, so the 200-day SMA near 103.67 looks stronger. In case it gives way, look for support at the 55-day SMA near 103.08.
Inflation FAQ
What is Inflation?
Inflation measures the rise in prices of a representative basket of goods and services. General inflation is usually expressed as a month-on-month and year-on-year percentage change. Core inflation excludes more volatile items, such as food and fuel, which can fluctuate due to geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the target level of central banks, which are mandated to keep inflation at a manageable level, typically around 2%.
What is the Consumer Price Index (CPI)?
The Consumer Price Index (CPI) measures the variation in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage of inter-monthly and inter-annual variation. Core CPI is the target of central banks as it excludes food and fuel volatility. When the underlying CPI exceeds 2%, interest rates usually rise, and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually translates into a stronger currency. The opposite occurs when inflation falls.
What is the impact of inflation on currency exchange?
Although it may seem counterintuitive, high inflation in a country drives up the value of its currency and vice versa in the case of lower inflation. This is because the central bank will typically raise interest rates to combat higher inflation, attracting more global capital inflows from investors looking for a lucrative place to park their money.
How does inflation influence the price of Gold?
Gold was once the go-to asset for investors during times of high inflation because it preserved its value, and while investors often continue to purchase gold for its safe haven properties during times of extreme market turmoil, this is not the case. most of the time. This is because when inflation is high, central banks raise interest rates to combat it.
Higher interest rates are negative for Gold because they increase the opportunity cost of holding Gold versus an interest-bearing asset or placing money in a cash deposit account. On the contrary, lower inflation tends to be positive for Gold, as it reduces interest rates, making the shiny metal a more viable investment alternative.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
