US Dollar trades broadly flat ahead of PCE inflation data
- The US Dollar trades roughly flat ahead of the US session.
- Markets are digesting the conviction of former President Donald Trump.
- The US Dollar Index trades in the higher 104.00 level with 105.00 in reach.
The US Dollar (USD) trades broadly flat on Friday after it got put back to square one on Thursday amid another round of weak economic data Another red housing data point together with a softer reading on nearly all fronts in the second US Gross Domestic Product reading for the first quarter was enough to weaken the Greenback back to levels seen at the start of the week. Meanwhile, overnight former US President Donald Trump got convicted on all charges and will hear his sentence on July 11, just a few days ahead of the GOP presidential candidate nomination.
On the economic data front, all eyes are on the Personal Consumption Expenditures (PCE) Price Index numbers, which is the Federal Reserve’s (Fed) preferred inflation gauge. Markets will be able to see if the Fed is right to raise concerns or if the disinflation process is still intact towards a September initial rate cut. Besides that, there is the Chicago Purchasing Managers Index (PMI) to give further clues about the health of the economy.
Daily digest market movers: PCE make or break
- The Personal Consumption Expenditures Price Index for April is to be released at 12:30 GMT:
- The monthly Headline PCE expected to come in at 0.3%, unchanged, while the yearly headline PCE is expected to remain unchanged as well at 2.7%.
- The monthly core PCE was at 0.3% in March and is expected to come in at 0.3% as well for April. Yearly core PCE should remain unchanged at 2.8%.
- Personal Income is expected to increase 0.3%, slowing from the 0.5% a month earlier.
- Personal Spending is forecasted to slow sharply to 0.3% from 0.8%.
- The Chicago PMI for May is expected to come in at 41, still in contraction territory, though a bit better compared with the previous 37.9.
- Federal Reserve Bank of Atlanta President Raphael Bostic will close off this Friday by delivering a speech at the Augusta Technical College's spring commencement ceremony near 22:15 GMT.
- Asian equities are rallying this Friday, with the Japanese Topix leading the charge by gaining 1.7%. European equities are taking over the positive tone, though less clear, with some mild gains. US futures are lagging, though with minor losses.
- According to the CME Fedwatch Tool, Fed Fund futures pricing data suggests a 49.0% chance for keeping rates unchanged in September, against 45.1% chance for a 25 basis points (bps) rate cut and a 5.4% chance for an even 50 bps rate cut. A marginal 0.5% price in an interest rate hike.
- The benchmark 10-year US Treasury Note trades around 4.56%, and is nearly flatlining since the US session from Thursday.
US Dollar Index Technical Analysis: Going out with a bang
The US Dollar Index (DXY) is tossing a coin this Friday on which way it will go. Tensions are high with a big army of Fed officials constantly coming out, warning markets that rates will need to stay higher for longer, might even hike once more and that an initial rate cut might not even be for 2024. Meanwhile, the prepositioning patience of traders in risk-on assets is starting to run out and might spiral into equities over the summer if no clear time frame is starting to get formed on the Fed’s monetary path ahead.
On the upside, the DXY index reclaimed the key levels: the 55-day Simple Moving Average (SMA), currently at 104.98, and the 105.00 big round level. It will be important to see if these levels hold support should the US data weaken. Once that is proven, look for 105.52 and 105.88.
On the downside, the 200-day SMA at 104.43 and the 100-day SMA around 104.40 are the last line of defence. Once that level snaps, an air pocket is placed between 104.30 and 103.00. Should the US Dollar decline persist, the low of March at 102.35 and the low from December at 100.62 are levels to consider.
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.