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US Dollar Weakens Ahead of CPI Data and Jerome Powell Testimony

  • The US Dollar, down 0.80% last week, now at its lowest level since mid-June.
  • Anticipation is mounting with the upcoming release of June inflation figures and Fed talks.
  • The market is pricing in less than a 10% chance of a cut in July and around 80% in September.

He American dollar The US dollar continues to struggle amid signs of disinflation in the US economy, boosting confidence in a possible rate cut in September by the Federal Reserve (Fed) among market participants. This week, words from Fed Chairman Jerome Powell and other governors could rescue the USD and limit losses if they remain cautious.

Despite persistent weakness in US indicators, Fed officials are still reluctant to agree to cuts, opting to remain data-driven and may continue to call for patience.

Daily Market Drivers Roundup: US Dollar Remains Weak Ahead of CPI and Jerome Powell Testimony

  • Among the week’s highlights were Chairman Jerome Powell’s Semiannual Monetary Policy Report to Congress, multiple speeches by Fed officials, and the release of June inflation data.
  • On Thursday, the headline Consumer Price Index (CPI) is expected to have fallen two points to 3.1% year-on-year, while the core figure is expected to remain stable at 3.4% year-on-year.
  • For now, the market is predicting a less than 10% chance of a rate cut at the July 31 meeting, with the odds rising to around 80% by September.

DXY Technical Outlook: DXY struggle persists as it trades below the 20-day SMA

Following the DXY’s fall below the 20-day simple moving average (SMA) and a 0.80% decline last week, the technical outlook has changed for the worse. Both the RSI and MACD have fallen into negative territory.

Meanwhile, the 104.70 area, marked by the 200-day SMA, continues to provide strong support. If selling pressure continues, the 104.50 and 104.30 areas could potentially stop further losses.

Inflation

Inflation measures the rise in prices of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change month-on-month and year-on-year. 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 that economists focus on and is the target level for 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 month-on-month and year-on-year. The core CPI is the target for central banks as it excludes the volatility of food and fuel. When the core CPI exceeds 2%, interest rates typically 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 is true 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 will typically raise interest rates to combat higher inflation, which attracts more global capital inflows 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 still buy 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 putting the 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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