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US dollar falls after inflation slows in April

  • The DXY fell to its lowest level since mid-April on Wednesday.
  • Weak US inflation data and unimpressive retail sales increase the likelihood of a Fed rate cut in the near term.
  • In the markets, the probability that the first cut will occur in September continues to increase.

The US Dollar Index (DXY) is trading near 104.4 on Wednesday, posting heavy losses triggered by a softer-than-expected Consumer Price Index (CPI) and flat April retail sales.

The US economy is showing signs of pressure, as April inflation appears to have slowed. Federal Reserve (Fed) Chairman Jerome Powell's cautious stance, along with mixed output price index (PPI) readings, are highlighting concerns about future inflation dynamics, which appear to be weighing on the dollar.

Daily Market Moves Summary: DXY Falls After Weak CPI Figures

  • The US Bureau of Labor Statistics reported a decline in the inflation rate to 3.4% annually, down from 3.5% the previous month and in line with market expectations.
  • The annual core CPI fell to 3.6% in April, compared to 3.8% year-on-year in March, in line with forecasts.
  • Both the CPI and the core CPI registered an increase of 0.3% monthly in this period.
  • Retail sales in the US recorded no growth in April, below the expected 0.4% month-on-month, which represents a decrease compared to the 0.6% month-on-month recorded a month earlier.
  • Falling retail sales could spell potential trouble for the US economy, possibly causing the Fed to consider rate cuts sooner.
  • According to CME's FedWatch tool, a June hold is about to be priced in, as the odds of a July cut increase slightly. The meeting most likely to cut is the FOMC meeting in September.

DXY Technical Analysis: DXY shows a negative bias, although bullish signals remain

The indicators on the daily chart reflect a mixed technical picture for the DXY, but are leaning mostly bearish. The RSI is showing a negative slope and is in negative territory, indicating strong selling momentum. This suggests that the bears are gaining control in the short term. Furthermore, the moving average convergence divergence (MACD) shows ascending red bars, indicating that the bearish momentum is strengthening.

The position of the asset with respect to its simple moving averages (SMA) shows some optimism for the Dollar. Despite being below the 20-day SMA and thus facing short-term selling pressure, the DXY remains above its 100-day and 200-day SMA. This means that, despite the recent bearish momentum, the medium and long-term trend continues to favor bulls. However, the bears are approaching the 200-day SMA at 104.10, which if exceeded would paint the technical outlook red.

Inflation FAQ

Inflation measures the rise in prices of a representative basket of goods and services. General inflation is usually expressed as a monthly and annual 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%.

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 monthly and 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.

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 typically raises interest rates to combat higher inflation, attracting more inflows of global capital from investors looking for a lucrative place to park their money.

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. Conversely, lower inflation tends to be positive for Gold as it lowers interest rates, making the shiny metal a more viable investment alternative.

Source: Fx Street

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