The US Dollar Index (DXY) experienced a calm session on Monday with slight losses, although it remained stable near the highs from the previous week. Amidst tensions in the Middle East, investors are eagerly awaiting key events such as the release of the Federal Reserve’s Federal Open Market Committee Meeting Minutes and US Consumer Price Index data. Despite a moderate slowdown in the US economy, signs of resilience are still present. The Fed continues to prioritize data-driven decisions, considering incoming economic indicators to determine the timing of interest rate adjustments. Last week’s jobs report led to a reevaluation in the market, resulting in the elimination of the possibility of a 50 basis points cut in November or December.
The market now reflects a zero probability of a 50 basis points cut in the near future, with a 25 basis points cut in the next month being only 90% priced in. Even with strong economic data, investors are still anticipating a total easing of 125 basis points in the next 12 months. This week will see multiple Fed speakers emphasizing the importance of data dependency, reinforcing the cautious approach taken by the central bank. The upcoming release of the headline and core CPI data is expected to show a slight slowdown in September, which could potentially halt the upward movement of the USD.
From a technical perspective, the momentum of the DXY has paused after the recent gains, ending a five-day uptrend. Indicators such as the Relative Strength Index and Moving Average Convergence Divergence are currently in positive territory, suggesting room for further upside potential. Key support levels for the DXY include 102.30, 102.00, and 101.80, while resistance levels can be found at 103.00, 103.50, and 104.00.
Inflation is a key factor influencing currency movements, with higher inflation typically resulting in a stronger currency. The Consumer Price Index (CPI) measures changes in the prices of goods and services over time, with core CPI excluding volatile elements like food and fuel. Central banks target core inflation levels to maintain stability, typically around 2%. High inflation can lead to higher interest rates, which attract global capital inflows and strengthen a currency. Conversely, lower inflation may weaken a currency as central banks lower interest rates to stimulate the economy.
Traditionally, gold has been seen as a hedge against inflation, as it preserves its value during times of economic uncertainty. However, in periods of high inflation, central banks tend to raise interest rates, negatively impacting gold prices. Lower inflation, on the other hand, tends to benefit gold as it reduces the opportunity cost of holding the precious metal compared to interest-bearing assets. Monitoring inflation trends is crucial for investors to make informed decisions about their portfolios and currency exposures.
