US Dollar consolidates ahead of key March CPI data
- The US Dollar trades flat at 104.00, with stakes being high for the Greenback ahead of the release of the March inflation data.
- Traders see this US CPI print for March as key to gauge the chances of a Fed policy pivot this year.
- The US Dollar Index orbits around 104.00 and could move substantially in either direction.
The US Dollar (USD) trades broadly unchanged on Wednesday as the Greenback faces one of its most crucial moments of 2024 so far. With the release of the US Consumer Price Index (CPI) data for March, markets will finally get some idea on whether the US Federal Reserve (Fed) is right on the money or is facing one of its biggest policy mistakes in decades. Whatever the outcome, this is the only moment ahead of the US presidential elections for the US Dollar Index to finally snap out of that 5% range which is keeping the DXY chained for 2024 thus far.
Some additional insights reveal that markets are tilted to a decline, which fits with the narrative in the CME Fedwatch Tool, which points that markets are still pricing in a few interest-rate cuts this year. Headline monthly inflation is expected to fall to 0.3% in March from 0.4% in February, with the survey ranging between 0.5% on the upside and 0.2% on the downside. Core monthly inflation is also expected to come in at 0.3% from 0.4%, with the topside expectation at 0.4% and the downside at 0.2%. Any print below the lowest expectation could see ample US Dollar weakness, while any figure above the highest expectation will mean a repricing in the number of rate cuts, likely leading to substantial US Dollar strength.
Daily digest market movers: The end of low volatility
- At 11:00 GMT, this eventful Wednesday will kick off with the Mortgage Bankers Association (MBA) numbers. The MBA Mortgage Applications for the week ending on April 5 will be released. The previous reading for the week ending on March 29 was at -0.6%. No forecast is available.
- At 12:30 GMT, the US Consumer Price Index for March will be released:
- Monthly headline inflation is expected to fall to 0.3% against 0.4% in February.
- Yearly headline inflation is seen accelerating to 3.4% from 3.2%.
- Monthly core inflation is expected to slow to 0.3% from 0.4%.
- Yearly core inflation is expected to come down to 3.7% from 3.8%.
- At 14:00 GMT, Wholesale Inventories data for February will be released, with a steady 0.5% increase expected.
- Federal Reserve Bank of Chicago President Austan Goolsbee will be speaking around 16:45 GMT.
- The Federal Open Market Committee (FOMC) will release its recent March meeting Minutes around 18:00 GMT. Traders will be looking for clues or clearer evidence for the timing of when the Fed will start cutting its interest rates.
- Asian equities are very much dispersed with only the Chinese Hang Seng Index being up near 2%. All other Asian indices are in the red. European and US equities are mildly in the green ahead of US inflation release.
- According to the CME Group’s FedWatch Tool, expectations for the Fed’s May 1 meeting are at 97.4% for keeping the fed funds rate unchanged, while chances of a rate cut are at 2.6%.
- The benchmark 10-year US Treasury Note trades around 4.36%, which is lower ahead of US inflation.
US Dollar Index Technical Analysis: This is it, the moment markets have been waiting for
The US Dollar Index (DXY) has been consolidating since the first days of 2024. Although the trading range looks to be around 5% from the beginning of this year, it has been even limited to only 3% most of the time. Volatility is nowhere and short-lived, if any, so this US CPI print on Wednesday is crucial as it could be the last possible data point confirming if the Fed is good to start reducing borrowing costs in June, or might not cut rates until after summer or not at all for 2024.
The first pivotal level for the DXY comes in at 104.60, which was broken last week on Wednesday to the downside, though broken up again from below on Friday. Further up, 105.12 is the key point after the DXY failed to break that level last week. Once above those levels, 105.88 is the last resistance point before the Relative Strength Index (RSI) enters overbought levels.
Support from the 200-day Simple Moving Average (SMA) at 103.81, the 100-day SMA at 103.43, and the 55-day SMA at 103.90 showed their importance last week on Wednesday. Further down, the 103.00 big figure looks to remain unchallenged for longer with ample support thus standing in the way.
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.