US Dollar continues gaining ground as markets brace of US inflation data

• US Dollar gains on Monday with the DXY above 105.50.
• The fundamental Greenback uptrend remains intact as the US economy continues to outperform other advanced economies.
• Key data releases this week include the US October CPI on Wednesday and Retail sales on Friday.

The US Dollar Index (DXY), which measures the value of the USD against a basket of six currencies, is broadly gaining in Monday's session. The focus for traders is now on the US inflation data for October, which will be released later this week. A strong inflation reading could further boost the US Dollar as it would increase expectations that the Federal Reserve (Fed) might slow the pace of interest rate easing.

The DXY initially rose last Friday after positive UoM consumer confidence data and the Federal Open Market Committee’s (FOMC) announcement of a 25 bps rate cut. Despite concerns over easing labor market conditions, the Fed expressed optimism about economic growth. 

Daily digest market movers: US Dollar continues rising toward multi-month highs

• The fundamental US Dollar uptrend remains intact despite Trump's victory stalling the currency.
• The US economy is outperforming other advanced economies and is in a "sweet spot."
• The prospect of looser fiscal policy under Trump and limited Fed easing room point to a stronger Greenback.
• The US October CPI on Wednesday and Retail Sales on Friday, are this week's data highlights.
• There are also plenty of Fed speakers throughout the week including Chair Powell on Thursday.
• Growth remains solid in Q4 with the Atlanta Fed GDPNow model's estimate for Q4 GDP standing at 2.5% SAAR.
• The New York Fed’s Nowcast model is tracking Q4 growth at 2.1% SAAR.

DXY technical outlook:  Bulls gather momentum but approach overbought conditions

The DXY index advanced above the key resistance at 105.50 on Monday, reaching levels last seen in July. This bullish move has been supported by technical indicators that remain in positive territory. 

However, the indicators are approaching overbought levels, suggesting that the index may be due for a correction in the near term. Traders should monitor the index closely to see if it can maintain its momentum or if it will pull back in the coming days.

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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