US Dollar sees red on soft PCE figures
- US Dollar saw a slight dip at the end of the week, clearing daily gains.
- US Dollar finds support amid high US Treasury yields.
- MayÂ’s PCE data showed an unexpected deceleration in US inflation.
The end of the week saw the US Dollar, as benchmarked by the DXY Index, settle near 105.80, after hitting a high of 106.13 earlier in the session. This follows the release of Personal Consumption Expenditures (PCE) data, but the losses are limited by the high US Treasury yields.
The American economy remains resilient with slight inflationary signals, which is just enough to keep the Federal Reserve (Fed) from completely embracing the easing cycle.
Daily digest market movers: US Dollar dips on weak PCE data
- On Friday, MayÂ’s Personal Consumption Expenditures (PCE) showed headline inflation soften to 2.6% YoY, down from the previous monthÂ’s 2.7%.
- Core PCE (which excludes volatile food and energy prices) has also experienced a decline to 2.6% from the previous 2.8% in April.
- US Treasury yields provide resilience to the Dollar, with the 2, 5 and 10-year rates at 4.71%, 4.32%, and 4.33%, respectively.
- Probability of a Fed rate cut in September marginally increased to 66%, up from the pre-release expectation of 64% as per CME Fedwatch Tool.
- Focus will now shift to labor market data from June.
DXY technical outlook: Positive momentum persists, index eyeing higher grounds
Despite the recent data fluctuations, the technical outlook remains positive, with indicators in green but losing some steam. The Relative Strength Index (RSI) continues to be above 50 but appears to point downward, indicating a slight pause in the bullish momentum. The green bars are still developing in the Moving Average Convergence Divergence (MACD), further facilitating the positive view but at a slower pace.
The DXY Index holds above the 20, 100 and 200-day Simple Moving Averages (SMAs), confirming its ongoing positive stance. Despite the IndexÂ’s steadiness at the highs seen since mid-May, there is room for further rise, suggesting the DXY is poised for further upside with the 106.50 zone next in sight. Conversely, 105.50 and 105.00 will be areas to observe in case of a drawdown.
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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