- The US Dollar trades broadly flat and stabilizes after US CPI release on Wednesday.
- Traders see inflation roll off quicker than expected in February.
- The US Dollar Index holds in the mid-103.00 area with markets digesting the recent inflation reading.Â
The US Dollar Index (DXY), which tracks the performance of the US Dollar (USD) against six major currencies, trades broadly flat and stabilizes on Wednesday while traders digest the United States (US) Consumer Price Index (CPI) release for February. Both yearly and montly numbers for the core and headline inflation came in below expectations, which means that inflation was still slowing in February ahead of the tariffs US President Donald Trump imposed at the start of March.Â
On the geopolitical front, China again vowed to retaliate on US tariffs. Meanwhile, Europe is set to issue countermeasures on April 13, European Union (EU) leader Ursula Von Der Leyen said this Wednesday. Overnight headlines emerged on the Ukraine-Russia war, where a ceasefire truce is on the table after Ukraine agreed to a brokered deal by the US. The ball is now in the court of Russia to support or refuse it.Â
Daily digest market movers: CPI slowdown
- The US Consumer Price Index (CPI) report for February has been released:
- The monthly headline inflation came in at 0.2%, below the 0.3% consensus and further down from 0.5% in January. Core inflation eased to 0.2%, a touch softer than the expected 0.3% and from 0.4% previously.
- The yearly headline reading came in at 2.8%, just below the 2.9% consensus and down from 3.0% in January. The core gauge softens to 3.1%, below the 3.2% estimate and down from 3.3% in the previous month.Â
- A much softer reading in inflation data should boost rate-cut bets for the Federal Reserve (Fed) and result in another drop in the US Dollar.Â
- Around 17:00 GMT, the US Treasury will auction a 10-year Note.Â
- At 17:35 GMT, St. Louis Fed President Alberto Musalem will speak at the NABE Economic Policy Conference in Washington, D.C.
- Equities are seeing overall more than 1% gains with European and US equity indices rallying higher after the US CPI release.Â
- The CME Fedwatch Tool projects a 97.0% chance for no interest rate changes in the upcoming Fed meeting on March 19. The chances of a rate cut at the May 7 meeting stand at 37.6% and 81.7% at June’s meeting.
- The US 10-year yield trades around 4.31%, off its near five-month low of 4.10% printed on March 4.
US Dollar Index Technical Analysis: Not that clear
The US Dollar Index (DXY) still faces potential selling pressure as recession fears remain. Traders are concerned about tariffs’ impact and uncertainty on the US economy. A softer inflation reading could help take away the recession fear, though it would still result in a weaker US Dollar with an increasing Federal Reserve’s rate cut bets and a declining rate differential with other countries as main drivers.Â
Upside risk is the fear of a rejection at 104.00 that could result in more downturn. If bulls can avoid that, look for a large sprint higher towards the 105.00 round level, with the 200-day Simple Moving Average (SMA) at 105.03. Once broken through that zone, a string of pivotal levels, such as 105.53 and 105.89, will present as caps.Â
On the downside, the 103.00 round level could be considered a bearish target in case US yields roll off again, with even 101.90 not unthinkable if markets further capitulate on their long-term US Dollar holdings.Â
US Dollar Index: Daily Chart
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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