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- The US Dollar holds steady on Friday after the US PCE reading for January.
- No surprises in the PCE numbers which all were in line of expectations.
- The US Dollar Index (DXY) tries to consolidate gains above 107.00.
The US Dollar Index (DXY), which tracks the performance of the US Dollar (USD) against six major currencies, is flat and orbits around 107.30 at the time of writing on Friday and tries to keep a hold on that level. Markets got shaken up again overnight as United States (US) President Donald Trump confirmed that tariffs for Canada and Mexico are going into effect on March 4. Meanwhile, China will face an additional 10% levy on the same day.
On the economic data front, all eyes on Friday were on the Personal Consumption Expenditures (PCE) data for January. In the second reading of the US Gross Domestic Product (GBP) for the fourth quarter of 2024 on Thursday, the PCE components for both the headline and the core reading were revised up. Though the January numbers were in line of expectations and did not trigger or see any outside moves.
Daily digest market movers: Dull data
- Ukraine President Volodymyr Zelenskyy is heading to Washington D.C. to sign a rare-earth deal with US President Donald Trump this Friday.
- The Personal Consumption Expenditures Price Index for January was nearly fully in line of expectations:
- The monthly headline PCE came in at 0.3%, unchanged from the previous reading.
- The monthly core PCE ticked up to 0.3% from 0.2% in December.
- The headline PCE rose to 2.6%, beating the 2.5% year-over-year compared to 2.6% in December, while the core PCE is expected rose to 2.6% in January compared to 2.8% in the previous month.
- At 14:45 GMT, the Chicago Purchase Managers Index for February is due. The expectation is still for a contraction at 40.6, coming from 39.5 in January.
- Equities are seeing US equities starting to tick higher just ahead of the US opening bell.
- The CME Fedwatch Tool projects a 29.7% chance that interest rates will remain at the current range of 4.25%-4.50% in June, with the rest showing a possible rate cut.
- The US 10-year yield trades around 4.25%, further down from last week’s high at 4.574%.
US Dollar Index Technical Analysis: Flat into the weekend
Finally, the US Dollar Index (DXY) might have had a nice uptick. Holding current ground will be key, with the biggest challenge coming from US yields still trending lower, narrowing the rate differential between the US and other countries. Another leg lower is possible should inflation concerns swirl back and push US yields higher again, supporting a stronger US Dollar.
On the upside, the 55-day Simple Moving Average (SMA) is the first resistance to watch for any rejections, currently at 107.97. In case the DXY can break above the 108.00 round level, 108.50 is coming back in scope.
On the downside, as already mentioned, 107.00 needs to hold as support. Nearby, 106.80 (100-day SMA) and 106.52, as a pivotal level, should act as support and avoid any returns to the lower 106-region.
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.
