The US Dollar (DXY) saw a slight rise on Tuesday, despite falling US Treasury yields expected to pose challenges for the session. The shift comes amidst new economic plans hinted at by former President Donald Trump, influencing financial markets after Joe Biden’s exit. The focus remains on high-tier data expected this week, as markets show optimism over rate adjustments in September due to signs of disinflation in the US. However, Federal Reserve officials maintain a cautious approach towards rate changes, keeping the markets attentive. Key indicators to watch include Personal Consumption Expenditures (PCE) and Gross Domestic Product (GDP) Q2 revisions.
Mid-tier housing data showed a lower than expected performance with Existing Home Sales posting a high monthly drop in June, but this did not result in major movements on the US Dollar. Despite a weak Richmond Fed manufacturing index, the USD bulls continued to advance. Forecasts project a slight monthly increase in the core PCE and spending, with the CME FedWatch Tool indicating a high probability of a rate cut in September. The dynamics for the USD this week will depend on GDP and PCE data, as US Treasury yields continue to fall.
In terms of technical outlook, the DXY index has seen a slight bullish trend, yet bearish signals persist. Despite an uplift above the 200-day Simple Moving Average (SMA), indicators are mostly in the negative zone, with a potential bearish crossover between the 20 and 100-day SMAs around the 104.80 area. Should this crossover occur, it could provide momentum to sellers in the market.
Inflation is a critical factor that influences currency values, as it measures the rise in prices of goods and services over time. Headline inflation is expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation, which excludes volatile elements like food and fuel, is the figure focused on by economists and central banks. When inflation rises above 2%, it typically results in higher interest rates, which can strengthen a country’s currency.
Historically, gold has been considered a safe-haven asset during periods of high inflation. However, higher inflation leads to increased interest rates by central banks, which can be negative for gold as it increases the opportunity cost of holding the precious metal. Conversely, lower inflation tends to be positive for gold, as lower interest rates make it a more attractive investment option. Overall, inflation plays a crucial role in shaping currency values and investment decisions in the financial markets.
