The US dollar is recording slight changes as this week begins. Investors are watching and treading on the safe side before a major economic report which is the Consumer Price Index (CPI) of June. It is estimated that this inflation report shall provide further knowledge on whether the Federal Reserve would reduce the interest rates in the upcoming months.
So here
is the breakdown in simple terms.
What has happened to the Dollar?
At
present, the US dollar is stable. It has not moved that much since the
traders do not want to make any large decisions until they view the inflation
figures.
The
dollar is being measured against other major currencies such as the euro and
the yen and the DXY, its index is currently trading at a level
slightly below 105 points. It signifies that the dollar does not feel either
too strong or too weak—just waiting
The importance of the CPI Report.
CPI
report reveals
the extent to which items that are used in our daily lives such as food, rent,
clothes and gas are increasing. This assists the Fed to either increase or
decrease the interest rates.
These
are the June expectations given by experts:
·
Consumer
prices (overall inflation):
0.1 % in June (compared to last month) and 3.1 % in June (in comparison to the
previous year). This is quite less than May, 3.3 percent.
·
Core CPI (gets rid of
food and energy):
Increased 0.2 % following the month, and 3.4 % in comparison with the previous
year
It
implies that although the overall inflation rate is falling, there are certain
commodities whose prices are still increasing at a rate that has not pleased
the central bank. These include housing and service prices.
What are the Federal Reserve mindsets?
The
central bank of America (Federal Reserve) made it definite: they are not
going to reduce the interest rates before they are sure inflation can be
handled.
Recently,
the Fed Chair Jerome Powell has stated that they are searching more evidence
that the inflation will continue to decline. That way, should the CPI report indicate that the price is
still increasing then it would postpone any decision regarding an interest rate
cut.
So, as
things stand right now the markets believe the Fed will cut rates in September
with an approximate 64 % likelihood, although that can change rather
expeditiously with the incoming data.
What do Bond Markets and Currencies
Punish?
The
yields on US government bonds
(which move against prices) have fallen off by a little. This implies that
investors believe that there is a high likelihood of Fed relaxing their increase
in rates.
For
example:
·
The
10-yr Treasury yield has dropped to 4.19% as compared to 4.28%
this past week.
This
influences the dollar as well:
·
The
dollar versus the yen (USD/JPY) is about 157.30 which is somewhat
below current peaks.
·
EUR/USD (euro vs. dollar), is trading
above 1.0870 with the vitality of stronger European economic news.
Other Things
Affecting the Dollar
Other
factors (other than inflation) that are affecting the dollar include:
·
Election
period in the US:
Investors fear of an incoming new administration policy.
·
Global
tensions: The
South China seas and other geopolitical tensions are causing a few investors to
be wary.
·
Stock
market level: A
positive performance in the stock market such as in the S&P 500 and the
Nasdaq which is stock-heavy could also influence traders in the currency
market.
What Could Happen Next?
Everything
depends on what the CPI report shows. Here are two possible outcomes:
1. If Inflation is Lower Than Expected
- Markets will expect rate
cuts sooner.
- The dollar could weaken.
- Stocks and gold might go up.
2. If Inflation is Higher Than Expected
- The Fed may delay rate
cuts.
- The dollar could
strengthen.
- Stocks might fall, and
traders may turn more cautious.
Key
Levels to Watch
|
Currency
Pair |
Support
Level |
Resistance
Level |
Trend |
|
EUR/USD |
1.0830 |
1.0930 |
Neutral |
|
USD/JPY |
156.50 |
158.00 |
Slightly
Bullish |
|
GBP/USD |
1.2800 |
1.2950 |
Bullish |
|
DXY
Index |
104.50 |
105.10 |
Neutral |
Market Dynamics: Mermaid Flow Diagram
What Should Traders and Investors do?
If you're tracking the market, here's some
advice:
·
Be
flexible: Major
changes might occur after economic reports.
·
Monitor
the USD/JPY pair:
Since it responds swiftly to changes in
interest rate forecasts.
·
Keep
a watch on gold and bitcoin:
They often climb when the dollar falls.
·
Focus
on the Fed's interpretation of CPI statistics: Since it can immediately impact market
expectations.
Final Thoughts
The US
dollar is currently in wait-and-see mode. Everyone is watching the next CPI data to see
where the economy is going. The Federal
Reserve's decision to lower interest rates is heavily influenced by inflation
data.
Stay
tuned —watch the CPI release and position your trades before the dollar makes
its next move.
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