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US Dollar Index (DXY) holds steady near 101.70 ahead of US CPI report as Iran uncertainty persists
- DXY finds support from several factors as its overnight decline pauses.
- Conflicting accounts of US-Iran peace talks sustain the geopolitical risk premium.
- Expectations of a Fed rate rise lend further support to the USD before US CPI data.
Around 101.70, the US Dollar Index (DXY) is consolidating in Tuesday’s Asian session as markets await US consumer inflation data and further developments in the Middle East crisis. The index measures the Greenback’s performance against a basket of currencies.
Positive momentum towards ending the war on Iran makes renewed strikes quite unlikely, according to US President Donald Trump, who declared the conflict effectively over. By contrast, Mohsen Rezaei, Secretary of Iran’s Supreme National Security Council, rejected reports of ongoing negotiations as fake news. He reiterated that Washington must agree to Tehran’s seven conditions for ending the conflict. The resulting geopolitical risk premium continues to underpin the safe-haven US Dollar (USD).
Last Friday’s strong US Nonfarm Payrolls (NFP) report also reinforced market expectations of an imminent interest rate increase by the US Federal Reserve (Fed). Traders now put the probability of another rise in borrowing costs in December at over 80%, according to the CME Group’s FedWatch Tool. Although this provides additional support for the DXY, bullish traders are holding off on fresh positions until the US Consumer Price Index (CPI) report is released.
Markets will scrutinise the key inflation figures for further indications of the Fed’s policy direction. Alongside the data, geopolitical news will be a major influence on near-term USD movements and provide fresh impetus for the DXY. For now, the fundamental backdrop outlined above calls for caution among bearish traders considering positions for further declines.
Inflation Explained: Frequently Asked Questions
The increase in the cost of a representative basket of goods and services is measured by inflation. Headline inflation is generally reported as a percentage change both month-on-month (MoM) and year-on-year (YoY). By stripping out more volatile components, including food and fuel, core inflation excludes prices that can shift in response to geopolitical developments and seasonal influences. Economists concentrate on this core measure, which is also targeted by central banks. Their mandate is to maintain inflation at a manageable rate, typically around 2%.
Changes in the prices of a basket of goods and services over time are tracked by the Consumer Price Index (CPI). The figures are normally presented as percentage changes month-on-month (MoM) and year-on-year (YoY). Central banks target core CPI because it removes volatile food and fuel components. A core CPI reading above 2% generally leads to higher interest rates, while a reading below 2% usually has the reverse effect. Higher rates support a currency, so rising inflation typically strengthens it; falling inflation tends to produce the opposite outcome.
A country’s currency gains value when inflation is high and loses value when inflation is lower, however counter-intuitive that may appear. The explanation lies in the central bank’s usual response: raising interest rates to curb higher inflation. Those higher rates draw in more capital from global investors seeking attractive returns on their money.
Historically, investors sought out Gold during periods of high inflation for its ability to retain value. They still often buy Gold as a safe haven during severe market turmoil, but this pattern does not hold most of the time. Central banks tend to respond to high inflation by raising interest rates to bring it under control. For Gold, higher interest rates are unfavourable: they raise the opportunity cost of holding the metal rather than an interest-bearing asset or money in a cash deposit account. Conversely, lower inflation tends to benefit Gold by bringing interest rates down, making the precious metal a more attractive investment alternative.
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