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US Dollar resumes its downside, bears eye December lows

  • DXY Index plunged towards the 101.90 area, posting 0.40% daily losses.
  • Gross Domestic Product of the United States expanded at an annual rate of 4.9% in Q3, revised from 5.2%
  • US Jobless Claims accelerated in the second week of December.

The US Dollar (USD) measured by the DXY index plunged to 101.90 and nears December lows struck last week, steered by the downward revisions in US Gross Domestic Product (GDP) from Q3. Negative Jobless Claims and Philadelphia’s Fed manufacturing conditions figures also added to the downturn.

At the Fed’s last meeting, policymakers sent a dovish signal to markets. The cooling inflation and the absence of rate hikes in 2024, alongside 75 bps of easing forecasts, are all reflective of a less aggressive stance that weakened the US Dollar. Until the next bank’s meeting, all data that suggest a slowdown in the economy may pave the way for further downside, and the expectations of sooner rate cuts next year may come to fruition.

Daily digest market movers: US Dollar plunges as soft data and lower yields weigh

  • The US Dollar trending downward, bordering on December lows.
  • The US Q3 real GDP growth was revised down to 4.9%, from the initial 5.2% estimate due to reduced consumer spending and lower imports reported by the Bureau of Economic Analysis (BEA).
  • The Philly Fed Manufacturing sector survey for December plunged to -10.5. 
  • Initial Jobless Claims for the week ending December 16, published by the US Department of Labor, increased to 205K from the previous 202K, but came in lower than the 215K expected.
  • US bond yields declined following the release but seem to be recovering, with the 2-year yield at 4.34%, the 5-year yield at 3.86%, and the 10-year yield also at 3.87%, near multi-month lows, adding pressure to the USD.
  • As per the CME FedWatch Tool, markets are betting on rate cuts on March 2024.
  • November Personal Consumption Expenditures (PCE) Price Index figures from the US are due on Friday, which may fuel additional volatility on the index.

Technical Analysis: US Dollar Index selling momentum resumes, dampening recent upsurge 

On the DXY daily chart, the Relative Strength Index (RSI) exhibits a downward slope within negative territory, indicating a strong bearish momentum. Despite bulls gaining some ground in the last sessions, the overwhelming selling force isn’t allowing a significant shift in the short-term trend. On the Moving Average Convergence Divergence (MACD), rising red bars signal a sell-off is underway, further validating the negative outlook. 

Looking at the Simple Moving Averages (SMAs), the index position below the 20,100, and 200-day metrics shows a long-term dominance of the bears. This challenging position for the buyers, combined with the RSI and MACD indications, brings forth a short-term, bearish technical outlook. 

Support levels: 101.80,101.50, 101.30.

Resistance levels: 103.10 (20-day SMA), 103.50 (200-day SMA), 104.00.

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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