- The US Dollar Trades Lower on Tuesday as US-China Trade Optimism Wanes.
- Market Participants Interpret April’s US CPI Data as Suggesting Limited Inflationary Pressures.
- The US Dollar Index Retreats to 101.50 After Failing to Surpass the 102.00 Threshold.
The US Dollar Index (DXY), a measure of the US Dollar’s (USD) strength against a basket of six major currencies, is undergoing a correction, trading near 101.50 ahead of the US trading session on Tuesday. This partial retracement of Monday’s gains reflects growing skepticism among traders regarding the substance of the recently announced trade agreement between China and the United States (US). The agreement’s lack of specific details beyond tariff reductions, including concrete timelines or defined areas of cooperation, has fueled uncertainty, mirroring concerns surrounding the UK-US trade discussions from the previous Thursday.
In economic news, the US Consumer Price Index (CPI) data for April was released, largely aligning with market expectations. The absence of a significant inflationary surge has prompted traders to reassess the likelihood of potential interest rate cuts by the Federal Reserve in the near future. Adding to the discussion, Federal Reserve (Fed) Bank President of Chicago, Austan Goolsbee, cautioned that even the current levels of tariffs could exert inflationary pressure on the economy, as reported by the New York Times. His comments highlight the ongoing debate within the Fed regarding the balance between managing inflation and supporting economic growth.
Daily Digest: Market Reactions to Tepid CPI Data
- On Monday, President Trump voiced strong criticism of the European Union (EU), asserting that the US holds a dominant position in their ongoing trade negotiations. “The European Union is in many ways nastier than China. We’ve just started with them. We have all the cards. They treated us very unfairly,” Trump stated at the White House, signaling a potentially contentious path forward in trade relations.
- At 10:00 GMT, the National Federation of Independent Business (NFIB) published its Business Optimism Index for April. The index registered at 95.8, surpassing the anticipated 94.5 but falling short of the previous month’s 97.4. This suggests a slight moderation in business confidence among small business owners.
- The April US Consumer Price Index data release did not deliver any major surprises:
- The monthly headline CPI increased by 0.2%, below the consensus forecast of 0.3% and a rebound from the deflationary -0.1% recorded in March. The year-over-year figure stood at 2.3%, slightly lower than the previous 2.4%.
- The monthly core CPI also rose by 0.2%, narrowly missing the projected 0.3% and marginally higher than the 0.1% increase in March. The annual core CPI remained steady at 2.8%.
- Equity markets saw US futures recover from earlier losses, turning positive as the trading day progressed, reflecting a generally optimistic sentiment despite the mixed economic data.
- According to the CME FedWatch Tool, the probability of an interest rate cut by the Federal Reserve at its June meeting is currently estimated at only 8.2%. Looking further ahead to the July 30 decision, the implied probability of rates being lower than current levels stands at 38.6%, indicating growing expectations for potential easing later in the year.
- The US 10-year Treasury yield is trading around 4.45%, exhibiting some volatility as traders evaluate the possibility of future rate cuts by the Fed in response to the stable CPI figures.
US Dollar Index Technical Analysis: Gauging Inflationary Pressures
Technical indicators are flashing caution signals for the US Dollar Index on Tuesday. The DXY’s inability to breach the 102.00 level and its subsequent close below the key technical level of 101.90 increases the likelihood of a significant retracement towards 100.00. The upcoming US CPI release later today could prove crucial in either reinforcing this bearish outlook with a weaker Dollar or propelling it decisively above 102.00.
On the upside, the DXY is encountering technical resistance near 101.90, a level that served as a pivotal point throughout December 2023 and as a foundation for the inverted head-and-shoulders (H&S) pattern observed during the summer of 2024. Should Dollar bulls manage to drive the DXY higher, the 55-day Simple Moving Average (SMA) at 102.29 would represent the next significant hurdle.
Conversely, the previous resistance level at 100.22 is now acting as a robust support level, followed by 97.73, which is near the lows of 2025. Further down, relatively limited technical support exists around 96.94 before potentially testing the lower boundaries of the current trading range. These lower levels would be situated at 95.25 and 94.56, representing fresh lows not seen since 2022.
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.
