US Dollar: Multi-year high in Core CPI revives Fed rate hike expectations
Matt Weller, CFA, CMT February 19, 2016 10:00 AM
<p>After getting clobbered in the first two weeks of February, last week’s recovery in the US dollar was hardly surprising. What was more surprising though was the fact that it was actually driven by decent US economic data.</p>
After getting clobbered in the first two weeks of February, last week’s recovery in the US dollar was hardly surprising. What was more surprising though was the fact that it was actually driven by decent US economic data.
Last week, we noted the stronger-than-expected January US Retail Sales report, noting that the report represented, "just the most recent evidence that the US economy is, at worst, continued to muddle through," and that "it’s hard to square the decent economic data with the sharp declines in investor sentiment." Today’s consumer price index report represents another solid report in the same vein.
Consumer prices were flat (0.0%) m/m on a headline basis, which was actually a tick better than the -0.1% reading expected, but the more impressive reading by far was the "Core" CPI. Consumer prices excluding volatile food and energy components actually rose 0.3% m/m, driving the year-over-year rate to 2.2%, the highest reading since 2012.
While the Fed prefers to focus on an alternative measure of consumer prices called Core Personal Consumption Expenditures (PCE), the historically close correlation between the two, not to mention the strong gains in average hourly earnings in last month’s jobs report, suggests that price pressures may finally be starting to rise meaningfully in the US. Fed Funds futures traders are only pricing in about a 40% chance of another Fed rate hike at all this year, but if inflation continues to rise, expectations and the dollar itself should rise in sync.
Technical view: Dollar Index
On a technical basis, the US dollar index did bounce back this week, but the move is still viewed as an oversold bounce after the early-February collapse. As of writing on Friday afternoon, the dollar index is trading near the 97.00 level, testing the critical 97.00-50 range that has served as both support and resistance over the last few months.
The secondary indicators are predictably subdued, with both the RSI and the MACD holding in bearish territory, so bulls will need to see those improve before growing confident that dollar recovery is meaningful. On a price basis, a move back above 98.00 would shift the bias back in favor of the bulls for a potential continuation up toward 100.00 next.
Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to Forex.com or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.