US Dollar gives up gains from two year highs, closes the week strong

• US Dollar Index declines below 108.00 on Friday, November 22.
• DXY retreats from 2-year high despite strong S&P PMI data; profit-taking and China's stimulus package contribute to pullback.
• Fed officials remain cautious with Barkin citing inflation risks and Williams indicating potential rate reduction.

In Friday's session, the US Dollar Index (DXY) declined slightly after reaching a new two-year high amidst geopolitical instability. However, strong S&P PMI data reinforced the US economy's relative resilience, supporting the DXY's gains. 

The US Dollar's pullback was attributed to profit-taking and positive economic indicators from China, including a rate reduction and a comprehensive stimulus package. Consequently, the DXY retraced from above 108.00, stabilizing around 107.50.

The DXY, which values the Greenback against a basket of major currencies, maintains a bullish bias, driven by solid economic data and a less dovish Federal Reserve (Fed) stance. Despite the retreat, the uptrend remains intact, with investors now expecting a gradual pace of rate cuts. Technical indicators suggest potential consolidation, but the overall bullish momentum remains strong. 

Daily digest market movers: US Dollar holds gains after PMI data, profit-taking

• The US Dollar Index dipped after reaching a new two-year high due to geopolitical instability and profit-taking.
• The DXY found support from strong S&P PMI data indicating the US economy's resilience.
• Positive economic news from China, such as a rate cut and stimulus package, contributed to the DXY's pullback.
• On the data front, the US S&P Global Composite PMI rose by 1.2 points to 55.3 in November's flash estimate.
• The S&P Global Manufacturing PMI improved marginally from 48.5 in October to 48.8 but remains in contraction.
• The S&P Global Services PMI rose notably from 55 to 57, indicating continued expansion.

DXY technical outlook: Index consolidates after reaching 108.00

The DXY has shown signs of easing after reaching 108.00 due to profit-taking by investors. Technical indicators, particularly the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD), indicate overbought conditions, suggesting a possible slight correction in the index. Despite this, the index remains supported by strong economic data and hawkish Fed rhetoric, maintaining an overall bullish trend. The uptrend now faces resistance around 108.00 and support at 106.00-105.00, with profit-taking and risk-off sentiment potentially leading to a pullback or consolidation in the short term.

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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