US Dollar Index (DXY) was unable to find bullish follow-through. It has remained below that 99.20 level, despite taking into account the recently signed phase one trade agreement between the U.S. and China. As consumer inflation is projected to accelerate in May, largely driven by rising energy prices, market analysts remain cautious about the implications for monetary policy. Central banks are quite assiduous about this core inflation number. This information has recently been key to deciding on the next interest rate hike.
Traders largely shrugged off the stagnation in Dollar price action over the past four days. Those attempts to breakout above the 99.00 level found little momentum. The Dollar started out strongly Wednesday in the early Asian session only to give way to weakness as Europe opened for business. Beyond Federal Reserve policy, economists are looking ahead to a significant $39 billion auction of 10-year Treasury bonds. This enthusiasm comes on the heels of last month’s data, which reflected that indirect bidders accounted for 71% of the overall supply.
Inflation Trends and Central Bank Focus
Headline inflation is published as the percentage change both on a monthly (MoM) and yearly (YoY) temporal scale. This metric provides the best gauge of inflation across a wide range of prices and goods and services. More from Bloomberg In May, consumer inflation is set to pick up speed. This increase is largely driven by rising energy prices that have consistently dominated the global inflation picture.
Core inflation, though, is the key number that economists and policymakers hone in on. It strips out more volatile components like food and energy prices, giving a better indication of the trend in underlying inflation. This is why central banks—including our own Federal Reserve—work hard to keep inflation low. Their objective is to keep it as low as possible, usually 2% or less. This target is critical for encouraging economic stability and development.
When core Consumer Price Index (CPI) figures rise above the 2% threshold, it often triggers discussions about potential interest rate hikes. When core CPI drops below this threshold, central banks move to cut interest rates. This intended action would get the economy going again. With core inflation expected to be at the forefront of monetary policy deliberations in the coming weeks and months,
Market Reactions to Trade Deal
The recent trade agreement between the United States and China was not enough to support the US Dollar. This left many market participants disappointed, as they had hoped for much stronger support. As analysts were quick to point out, initial reaction shown indicating optimism, the Dollar showed a more reserved response to the agreement. Failure to make a clean getaway has prevented a quick burn through the buy-side price resolve. Consequently, the trading range has been very tight over the last few days.
In fact, the US Dollar had the most bullish performance during the Asian trading session, gaining against all but two Major Currencies. That upward momentum was quickly stopped once the rest of the world, especially Europe, began trading, raising doubts about the permanence of this morning’s sharp gains. The Dollar’s fight to breach key resistance levels has led many to wonder exactly how strong it is amidst all of the economic turmoil.
Upcoming Treasury Bond Auction
Looking forward, this has all eyes on a $39 billion auction of 10-year Treasury bonds on Wednesday. This auction is perhaps more timely than any as economists look to explain recent trends in strong bond demand. In May, indirect bidders took down over 71% of the supply. They made up 71%, which indicates high demand from institutional investors.
The outcome of this auction could have implications for interest rates and overall market confidence in US economic policy. As long as demand stays strong, that will be a positive signal of investor faith in US government debt, even with inflation worries on the rise. Any signs of sustained weak demand may fuel economic pessimism and vice versa, adding downward pressure to the Dollar.