US Dollar extends gains following Christopher Waller’s words

  • The DXY Index rose near 103.40 but was rejected by the 100-day SMA.
  • Fed’s Waller commented that the bank is within “striking distance of achieving sustainable 2% inflation”.
  • Rising US yields made the US Dollar gain interest.
  • Dovish bets on the Fed remain high.

The US Dollar (USD) started the trading session by surging to the 103.40 mark, quickly being pulled back by the resistance of the 100-day SMA. This swift rebound was primarily due to US traders returning from their holiday, further catalyzed by a progressive rise in yields. Federal Reserve’s (Fed) Christopher Waller’s hawkish comments where he noted that achieving a 2% inflation rate won’t be as easy as expected and intends only three rate cuts in 2024.

The markets are anticipating that the Fed’s easing cycle will begin in March, followed by another rate cut in May, which may limit any upside for the US Dollar. Despite higher CPI numbers, the market remains stubborn and expects the Fed to initiate its easing cycle sooner rather than later, and the soft PPI readings gave markets a reason to bet on a less aggressive approach. 

Daily digest market movers: US Dollar finds strength as US traders return, bond yields rise

  • No significant reports were released during the session.
  • US bond yields are edging higher, with the 2-year yield at 4.20%, the 5-year yield at 3.90% and the 10-year yield at around 4%.
  • Forward-looking markets anticipate that for the upcoming January meeting, the CME FedWatch Tool points toward no hike, with low probabilities of a rate cut. Additionally, markets are pricing higher odds of rate cuts in March and May 2024.
  • This week, the US will release Retail Sales figures from December and the Fed’s Beige Book, which may have an impact on those expectations.

Technical Analysis: DXY gets additional ground must regain the 100-day SMA to confirm a reversal

The Relative Strength Index (RSI), showcasing a positive slope in positive territory, points toward increasing bullish momentum. The Moving Average Convergence Divergence (MACD) affirms this trend with rising green bars, suggesting a build-up of buying pressure. The ongoing bullish control is further emphasized by the asset standing above the 20-day Simple Moving Average (SMA) – a sign of short-term strength.

On the contrary, the index’s position below the 100-day and 200-day Simple Moving Averages (SMAs) portrays an overarching bearish stance. This position indicates that despite short-term bullish advances, sellers still hold a broader market control and that buyers must regain the 100-day average to start considering the upward movements a reversal.

Support levels: 103.00, 102.80, 102.50.
Resistance levels: 103.40 (100-day SMA), 103.60, 103.80.

 

 

 

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.

Source: https://www.fxstreet.com/news/us-dollar-sees-gains-as-us-traders-return-and-yields-climb-202401161740