- The US dollar is holding on to Monday's gains in a first step toward recouping last week's losses.
- The publication of the CPI disappointed the markets as disinflation did not accelerate.
- The US Dollar Index is trading above 103.00 again on its way to recovery.
The US Dollar (USD) is trading broadly higher on Tuesday following the release of monthly Consumer Price Index (CPI) figures, which were higher than expected. It is clear that the markets are not happy with this, since they are rather looking for a faster disinflationary path. This means that in the restructuring of rate cuts, May is ruled out and the focus is now on June and July.
The US Consumer Price Index (CPI) remained broadly in line, apart from the annual components. Both the annual core CPI and the annual general CPI rose by 0.1%, rather reaching the upper level of the forecast estimates in each segment. This led to some weakness in the US dollar, and markets reduced their bets on a rapid rate cut in May or June.
The Dollar Index (DXY) attempted to recover a bit on Monday, but still has a long way to go to get back to the levels of two weeks ago.
To the upside, the first recovery is at 103.31, the 55-day SMA, and at the 200-day SMA, near 103.71. Once surpassed, the 100-day SMA appears at 103.74, which represents a double top in that area. Depending on the catalyst that drives DXY higher, 104.96 remains the key level on the upside.
The DXY is trading a bit in nomad land, with no significant support levels nearby. Further declines seem inevitable with 102.00 as the next level, which has some fundamental importance. Once there, the way is open for another leg down to 100.61, the 2023 low.
Inflation FAQ
Inflation measures the rise in prices of a representative basket of goods and services. General inflation is usually expressed as a percentage of inter-monthly and inter-annual variation. 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%.
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.
