US Dollar mildly strengthens following Powell’s Congressional testimony

  • US Dollar regained some ground afterJerome Powell’s comments.
  • Market retains confidence in a September rate cut.
  • Investors await June’s CPI snapshot of US inflation on Thursday.

The US Dollar staged a minor comeback and the DXY rose to 105.20, courtesy of Federal Reserve (Fed) Chairman Jerome Powell’s recent congressional comments, which shied away from embracing rate cuts in the immediate future, advocating for patience instead.

Tinged with disinflation indicators, the US economic outlook has raised hopes of a September rate cut. That said, Fed officials are in no rush to implement cuts, choosing instead to rely on data-centric indicators before making such decisions.

Daily digest market movers: DXY up as markets assess Powell’s words

  • Fed Chair Jerome Powell’s Semiannual Monetary Policy Report to Congress and his testimony before the Senate Banking Committee are the standout events on Tuesday.
  • Powell re-emphasized the need for encouraging economic data to shore up the Fed’s confidence in managing inflation effectively.
  • He underscored that it is not only high inflation that poses a risk but is apprehensive about announcing a rate cut until there is assured evidence that inflation is consistently gravitating toward the 2% target.
  • However, he stressed the importance of meeting-by-meeting policy decisions, admitting that while progress has been made toward the 2% inflation goal, the recent data needs to be more encouraging to warrant a rate cut.
  • US Consumer Price Index (CPI) arrives on Thursday and will be closely watched by market participants.
  • YoY CPI headline inflation is forecasted to decelerate by two points to 3.1%, and the core reading is expected to hold steady at 3.4%.
  • As per the CME FedWatch Tool, the probability of a rate cut in July remains below 10% but at approximately 80% for September.

DXY technical outlook: Recovery seems possible as DXY stays above 100-day SMA

While technically speaking the DXY experienced a downturn, losing 0.80% in value and slipping below its 20-day Simple Moving Average (SMA) last week, some recovery is now detected above the 100-day SMA. Both the Relative Strength Index (RSI) and the Moving Average Convergence Divergence (MACD) indicators have retreated into negative territory but are presenting better and gained momentum on Tuesday.

Nevertheless, the 104.78 zone, denoted by the 100-day SMA, has held strong, repelling sellers and thereby reestablishing support. Below there, the 104.50 and 104.30 zones could potentially act as robust backstops against further declines.

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.

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Nicholas ‘Nick’ Statman entered the property industry in 2001 and set up a property buying company that quickly established itself as one of the biggest in the sector. During this time the Company successfully transacted on thousands of residential properties across the UK. Nicholas Statman was an early pioneer of the ‘quick sale’ niche market which has since grown considerably with a multitude of companies now operating in the sector. Nicholas Statman has strategically built a sizeable residential and commercial property portfolio with a view to holding for optimum capital growth and a long term passive income. Nicholas Statman has been involved in almost every aspect of the property sector over a 20 year period – this includes buying and selling, development, letting and management and is now involved in the fast growing online/ hybrid Estate Agent industry.

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