US Dollar Index jumps after hot US CPI data reinforces hawkish Fed outlook

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The US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, climbs to a five-day high on Tuesday as stronger-than-expected US inflation data bolsters the hawkish Federal Reserve (Fed) outlook.

The US Dollar Index reached a five-day high as hotter-than-expected US inflation data boosted hawkish Fed expectations.
Ongoing uncertainty surrounding US-Iran peace negotiations supports safe-haven demand for the Greenback.
Technically, the DXY retains a modest bearish bias while trading beneath the 50-day, 100-day and 200-day SMAs.

Meanwhile, ongoing uncertainty surrounding US-Iran peace negotiations and growing doubts over the durability of the current ceasefire support safe-haven demand for the Greenback.

US consumer inflation accelerated in April, largely driven by higher energy prices amid supply disruptions around the Strait of Hormuz. Data released by the Bureau of Labor Statistics showed the headline Consumer Price Index (CPI) rose 0.6% MoM in April after increasing 0.9% in March, matching market expectations, while annual inflation accelerated to 3.8% from 3.3% previously, above forecasts of 3.7%.

Meanwhile, core CPI, which excludes volatile food and energy prices, rose 0.4% MoM, up from 0.2% in March and above expectations of 0.3%. On an annual basis, core inflation climbed to 2.8% from 2.6%, also exceeding forecasts of 2.7%.

Following the release, US Treasury yields moved sharply higher as traders scaled back expectations for near-term Fed rate cuts. According to the CME FedWatch Tool, the probability of a rate hike at the September meeting currently stands near 20%, rising to around 40% for the December meeting.

Looking ahead, traders will continue to closely monitor developments surrounding the US-Iran negotiations, while attention also turns to upcoming US economic data, including the Producer Price Index (PPI) report due on Wednesday and Retail Sales data scheduled for release on Thursday.

Technical Analysis:

In the daily chart, Dollar Index Spot trades at 98.39, holding below a tight band of key moving averages and keeping a modest bearish bias intact. The 100-day Simple Moving Average (SMA) at 98.46, the 200-day SMA at 98.53 and the 50-day SMA at 99.00 all sit overhead, suggesting rallies are likely to encounter supply near this cluster. Momentum remains subdued, with the Relative Strength Index (14) hovering just below the midline and the Moving Average Convergence Divergence (MACD) fractionally negative, hinting at a waning but still fragile recovery tone.

On the topside, initial resistance is seen at the 100-day SMA near 98.46, followed by the 200-day SMA around 98.53, while a stronger barrier emerges at the 50-day SMA at 99. On the downside, the next notable cushion is the horizontal support level at 97.83, where buyers previously emerged, and a break below this floor would reinforce the broader bearish narrative.

(The technical analysis of this story was written with the help of an AI tool.)

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.