The U.S. Dollar Index (DXY), which measures the dollar’s strength against a group of six major currencies, climbed to a five-day peak on Tuesday following stronger-than-anticipated inflation data from the U.S. This data seemed to reinforce the Federal Reserve’s hawkish stance. At that moment, DXY was trading around 98.38, reflecting an approximate 0.45% increase for the day.
Meanwhile, ongoing uncertainty about peace negotiations between the U.S. and Iran, along with skepticism regarding the stability of the current ceasefire, is bolstering interest in the dollar as a go-to safe-haven currency.
In April, U.S. consumer inflation gained momentum, largely driven by surging energy costs due to supply disruptions in the Strait of Hormuz. The Bureau of Labor Statistics reported that the composite consumer price index (CPI) increased by 0.6% month-on-month in April, following a 0.9% rise in March, aligning with market forecasts. Additionally, the annual inflation rate climbed to 3.8%, up from 3.3%, surpassing expectations of 3.7%.
Core CPI, which strips away fluctuating food and energy prices, also rose, by 0.4% month-on-month—up from 0.2% in March, and above the anticipated 0.3%. Yearly core inflation increased to 2.8%, exceeding the expected 2.7% from a previous 2.6%.
The announcement resulted in a surge in U.S. Treasury yields, as traders adjusted their expectations regarding a potential rate cut from the Fed in the near future. Currently, the probability of a rate hike in September sits around 20%, while it could rise to approximately 40% by the December meeting.
Looking ahead, traders will be keeping a close eye on developments in U.S.-Iran talks and the upcoming U.S. economic indicators, including Wednesday’s Producer Price Index (PPI) report and Thursday’s retail sales data.
Technical analysis:
On the daily chart, the dollar index is at 98.39, trading under a tight range of key moving averages, hinting at a moderate bearish trend. The 100-day simple moving average (SMA) is at 98.46, with the 200-day SMA at 98.53, and the 50-day SMA at 99.00, suggesting that any rally may face resistance in this area. Momentum indicators, like the Relative Strength Index (14), are lingering just below the midline, while the Moving Average Convergence Divergence (MACD) is slightly negative, indicating a fading recovery that remains somewhat fragile.
Resistance to the upside appears first at the 100-day SMA around 98.46, followed by 98.53 at the 200-day SMA, with a more significant barrier around the 50-day SMA at 99. The downside is looking at support at a horizontal level around 97.83, where buying interest has previously emerged; falling below this level would likely strengthen the bearish outlook overall.
Frequently asked questions about inflation
Inflation refers to the rise in the price of a representative collection of goods and services. Headline inflation is typically shown as a percentage change on both month-over-month (MoM) and year-over-year (YoY) bases. Core inflation removes more erratic elements like food and fuel, which can change due to geopolitical or seasonal reasons. This core figure is what analysts usually focus on, as it’s the target for central banks that aim to maintain inflation at manageable levels—typically around 2%.
The Consumer Price Index (CPI) tracks the price change of a basket of goods and services over time. It’s commonly expressed as a percentage change both month-over-month and year-over-year. Core CPI serves as a central bank’s target, excluding the volatile food and energy sectors. When core CPI rises above 2%, interest rates are likely to increase, and they typically fall when it dips below that threshold. A spike in interest rates tends to benefit the currency, so rising inflation generally raises currency value, and vice versa.
While it might seem odd, a country experiencing high inflation can see its currency’s value rise, and when inflation is low, the opposite tends to occur. This happens because central banks often boost interest rates to counter rising inflation, attracting global investment as people seek favorable financial opportunities.
Historically, gold was a preferred asset during periods of high inflation because it tended to preserve its value. While investors still sometimes turn to gold in turbulent market conditions, it’s not consistently the case. When inflation rises, central banks often increase interest rates, which has a negative effect on gold, increasing the opportunity cost of holding it instead of interest-bearing assets or savings. Conversely, lower inflation generally supports gold, lowering interest rates and making the precious metal a more attractive investment.
