Losses Continue for the Dollar After Lower Inflation

Markets in general have remained quite nervous this week amid the American government’s stop-start approach to tariffs and relatively strong losses by many major American shares in recent days. This article summarises the latest figures for American inflation then looks briefly at the charts of XAUUSD and EURUSD.

All of the monthly and annual core and non-core figures for inflation came in lower than expected for February on 12 March. However, it’s still questionable whether annual headline inflation’s uptrend is over:

Inflation for most specific products slowed or declined with the exceptions of food which increased slightly and natural gas which significantly increased. The result isn’t huge surprising but certainly suggests that another round of persistent high inflation remains questionable given that monetary policy remains highly restrictive compared to the norm over the last decade.

‘Trumpcession’ is already being thrown about in the media, but given that the supposedly impending recession since 2022 never materialised in the USA and was very mild in countries like the UK, it’s probably premature to start expecting a hard landing by the American economy. That depends on Mr Trump’s upcoming flip-flops on tariffs and what the Federal Reserve (‘the Fed’) might decide on rates next quarter.

There’s a fairly large consensus of around two thirds of participants expecting rates to remain on hold at least until May’s meeting of the Fed according to CME FedWatch. That has actually strengthened slightly since last week. A plurality expects three cuts by the Fed before the end of the year, but since this is only March it’s too early to set firm expectations on that. Traders are looking ahead eagerly to the Fed’s next meeting on Wednesday 19 March: a cut then is extremely unlikely but the press conference might shed some light on the Fed’s economic sentiment.

Gold Reacts Positively to American Inflation

Gold has held close to record highs since last week as geopolitical risks remain high. The latest American tariffs on steel and aluminium – including from friendly nations and blocs like the EU and Britain – were met with an announcement that 2018 European tariffs on American products would resume from 1 April. Uncertainty over trade wars is extremely high as both the USA and targetted nations often walk back new proposals very quickly after making them. Meanwhile Russia’s response to the proposed ceasefire is awaited. Lower American inflation seems positive because it might entrench further expectations for rates to be cut in June.

The price seems to be making another attempt at $2,960 in the aftermath of American inflation. The main technical factors in favour of a move up are the fairly strong response to 28 February’s intraday push below $2,900 and that the slow stochastic no longer signals overbought. However, second and subsequent tests are usually weaker and volume has declined in the last couple of days.

$2,850 or slightly below seems to be a strong zone of demand, so the price would probably bounce from there if tested again unless the fundamental situation changes significantly. It still seems likely that gold will reach $3,000 sooner or later, but the current situation makes finding a good entry with decent potential reward quite difficult unless there’s a retest lows from late last month.

Euro-dollar’s Uptrend Still Active After Lower US Inflation

Euro-dollar’s strong uptrend has continued in the last few days amid general weakness from the dollar and a generally negative reaction to inconsistent messaging on tariffs. Lower American inflation reduces the pressure on the Fed to keep rates high while recent comments from the ECB’s Executive Board seem to reduce the probability of immediate further cuts. As for gold but to a somewhat lesser extent, traders are also looking at reactions to the proposed ceasefire between Russia and Ukraine.

November 2024’s high around $1.094 could be a key zone of resistance which might resist testing, especially in the context of such aggressive gains in March so far and obvious buying saturation from both Bollinger Bands and the slow stochastic. If the price breaks through there, $1.10 is an obvious potential resistance.

The 100% monthly Fibonacci retracement around $1.07 might function as an important support in the near future, but it’s questionable whether the price will move down that far ahead of the Fed’s meeting. Much like gold it’s potentially challenging for new buyers to find a good entry here; a fairly distant stop after entering during a retracement would be less likely to be triggered prematurely.

This article was submitted by Michael Stark, an analyst at Exness.

The opinions in this article are personal to the writer; they do not represent those of Exness. This is not a recommendation to trade.