US Dollar recovers ahead of PCE data

• Market continues to overestimate Fed easing with the central bank pushing back against dovish expectations.
• Economic data remains solid as S&P Global preliminary September PMIs come in above expectations.
• Fed officials will try to push back on the dovish rhetoric.

The US Dollar Index (DXY), which measures the value of the USD against a basket of currencies, whipsaws in a volatile session on Wednesday, hovering around a 14-month low due to intensifying recession fears. Despite the market's persistent higher estimation of Federal Reserve (Fed) easing, the central bank has countered dovish expectations. Friday’s Personal Consumption Expenditures (PCE) figures from August will be closely watched.

While the US economy exhibits a slowdown in certain sectors, other areas remain resilient, supporting overall economic activity. Despite this mixed picture, the Fed emphasizes that the path of interest rate adjustments will hinge on forthcoming economic data.

Daily digest market movers: US Dollar gains despite steady dovish bets, markets await PCE figures

• Market continues to overestimate the extent of Fed easing despite some Fed Governors’ efforts to curb dovish expectations.
• Market is pricing in 75 bps of easing by year-end and 175-200 bps of total cuts over the next 12 months.
• On Thursday, Gross Domestic Product (GDP) and Friday’s PCE figures will be key for the USD dynamics.
• It is worth noticing that Jerome Powell stated that the pace of the easing cycle will depend on incoming data, so their outcome might shake the USD. Fed Chair Jerome Powell will be on the wires on Thursday.

DXY technical outlook: Bearish momentum persists, bulls lack strength

The DXY has largely bearish tradewinds casting it about on the technical charts.

The Relative Strength Index (RSI) and the Moving Average Convergence Divergence (MACD) gained some momentum, but the RSI remains below the negative zone, and the MACD continues to indicate flat green bars.

These technical indicators suggest that the bears are in control and that buying pressure is weak.

Support levels can be found at 100.50, 100.30 and 100.00, while resistance levels are located at 101.00, 101.30 and 101.60.

Inflation FAQs

What is inflation?

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%.

What is the Consumer Price Index (CPI)?

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.

What is the impact of inflation on foreign exchange?

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.

How does inflation influence the price of Gold?

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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