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- The US Dollar gets to keep gains but refrains from adding more.
- US Durable Goods fall below expectations.
- The US Dollar Index (DXY) hitted a fresh weekly high at 108.06 while trying to consolidate above the psychological 108.00 level.
The US Dollar Index (DXY), which tracks the performance of the US Dollar against six different major currencies, orbits around 108.00 throughout the European session and is up over 0.50%. The Nvidia rout from Monday, where Nvidia (NVDA) lost over $600 billion in market capitalization at one point, played into US President Donald Trump’s hand regarding his plan to impose a universal tariff. Markets even got more shaken up when t Trump advocated for a gradually increasing universal tariff plan, bigger than 2.5%.
On the economic data front, all eyes are on the US Federal Reserve (Fed) and the European Central Bank (ECB), which will announce their first monetary policy decisions this year on Wednesday and Thursday, respectively. Ahead of those monetary policy meetings, preliminary reading for the US December Durable Goods was released this Tuesday. A rather big miss on both the Headline and the reading without Transportation is limiting more upside in the DXY for now.
Daily digest market movers: US Consumer says “no”!
- Asian markets will quiet down this week and next. With the Lunar New Year starting this Tuesday, Chinese traders will return to the markets on February 5.
- The December US Durable Goods Orders data came in sluggish:
- Headline Durable Goods Orders contracted by -2.2%, failing to match the positive 0.8% estiamte and below the -1.2% from November.
- Durable Goods Orders without Transportation came in at 0.3%, a touch below the 0.4% compared to -0.2% in the previous month.
- At 15:00 GMT, the US Conference Board (CB) Consumer Confidence data for January will be released, expected to head to 105.7 from 104.7. Apart from that, the Richmond Fed Manufacturing Index for January should tick up marginally to -8 from -10.
- Equities are seeing their early recovery stall and are falling back to flat after their sharp decline on Monday in the Nvidia (NVDA) rout spillover.
- The CME FedWatch tool projects a 51.2% chance that interest rates will remain unchanged at current levels in the May meeting, with the remaining 48.8% chance of a rate cut that month. Expectations are that the Federal Reserve (Fed) will remain data-dependent with uncertainties that could influence inflation during US President Donald Trump’s term.
- The US 10-year yield is trading around 4.563% and starts its recovery towards the more-than-one-year high seen earlier this month at 4.807%.
US Dollar Index Technical Analysis: Not convinced
Although the US Dollar Index (DXY) might recover on Tuesday, this does not mean that all downside risk is avoided. Despite its surge back to 108.00, a rejection could occur again, causing the US Dollar Index to fall back to 107.59 or lower. The Relative Strength Index (RSI), which is still below 50, supports that risk possibility as it has more room to move lower before hitting oversold conditions.
The road to recovery is still not done and needs more upside. First, the psychological level of 108.00 must be recovered on a daily close. From there, 109.29 (July 14, 2022, high and rising trendline) is next to pare back last week’s losses. Further up, the next upside level to hit before advancing further remains at 110.79 (September 7, 2022, high).
On the downside, the 55-day Simple Moving Average (SMA) at 107.59 and the October 3, 2023, high at 107.35 acts as a double safety feature to support the DXY price. For now, that looks to be holding, though the Relative Strength Index (RSI) still has some room for the downside. Hence, rather look for 106.52 or even 105.89 as better levels for US Dollar bulls to engage and trigger a reversal.
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.
