US Dollar climbs to multi-week highs in over a month as US Treasury yields increase
- US Dollar extended recovery to Wednesday, reaching 106.00, its highest level since early May.
- Rising US Treasury yields lent support to the US currency.
- Week’s highlight remains June’s PCE inflation data due on Friday.
Wednesday’s session witnessed the US Dollar, as represented by the Dollar Index (DXY), climb to 106.00, a level last observed in early May.
The economic landscape in the US continues to portray resilience. A few signals of disinflation are noticeable, but it still holds on which makes the Federal Reserve (Fed) not fully embrace the easing cycle.
Daily digest market movers: US Dollar elevated by rising Treasury yields, eyes on PCE
- Wednesday’s standout data was the New Home Sales for May, which demonstrated a decline of about 11.3% to 619K units from 698K units in the prior release and beneath the 640K expected.
- Simultaneously, US Treasury yields are rising, with the 2, 5 and 10-year rates reported at 4.74%, 4.33%, and 4.31%, respectively.
- Expectations of a potential Fed rate cut in September continue to be high, odds from CME Fedwatch Tool are 60% for 25 bps cut.
- Thursday holds the Gross Domestic Product (GDP) revision for Q1, which is anticipated to hold steady at 1.3%.
- Friday’s significant event will still be the May Personal Consumption Expenditures (PCE) report, an inflation gauge favored by the Fed.
- Both headline and core PCE are projected to soften to 2.6% YoY, dropping from 2.7% and 2.8%, respectively, in April.
DXY technical analysis: Bullish momentum continues, index aims high
The technical outlook remains solidly optimistic with indicators firmly in the green. The Relative Strength Index (RSI) preserves a level above 50, while green bars are developing in the Moving Average Convergence Divergence (MACD), suggesting a gathering of strength among bulls. The progressive incline of these indicators demonstrating that the DXY may be preparing for additional upside.
Furthermore, the DXY Index maintains a standing position above the 20, 100 and 200-day Simple Moving Averages (SMAs), confirming a persistently positive outlook. With the Index reaching levels not seen since early May and with indicators showing a propensity for further increment, the DXY is oriented toward further gains. The 106.50 level is the next target for bulls.
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.