Some Further Strength for the Dollar After Higher Inflation

American annual headline inflation for January came in at 3%, slightly above the 2.9% as generally expected. The dollar made gains in the aftermath in many of its pairs, showing an especially strong intraday movement against the yen. This article summarises the context of the latest American inflation then looks briefly at the charts of XAUUSD and EURUSD.

January 2025 was the fourth consecutive month of rising inflation in the USA, so the current trend seems to be established:

Energy rose last month for the first time in six months while prices for used vehicles and transport also rose on average. It wasn’t very surprising to see the actual result slightly higher than the consensus given that the latest NFP showed a significant rise in average hourly earnings both monthly and annually.

Participants in general also seem to have been considering the likelihood of higher inflation because the probability of a cut by the Fed in June started to decline last week. According to CME FedWatch, the probability of a hold at the current 4.25-4.5% in June is around 64% compared to only 34% this time last week.

Comments this week from Jerome Powell to the Senate Banking Committee also seem to confirm that the Fed’s happy to wait. Dr Powell commented on the economy’s overall stability and pointed to the current funds rate being significantly lower than the peak last year.

Overall, the risk of a significant resurgence of inflation seems to be rather lower now that the current uptrend looks relatively modest and the Fed is committed to a patient approach. That’s broadly positive for the dollar and, in itself, negative for gold although sentiment on the metal remains extremely positive at the moment.

Gold Retreats from Recent Highs

Higher inflation and the lower probability of the Fed cutting again in the first half of 2025 has put some pressure on gold despite sentiment overall remaining very strong in recent weeks. Meanwhile various other major central banks such as the European Central Bank and the Bank of England remain more dovish and demand for havens is high amid trade wars and a possible resurgence of geopolitical tension centred on the middle east.

Gold’s extremely strong uptrend since the start of the year needs to pause sooner or later, and with the price having been within striking distance of $3,000 before inflation this seems like as good a place as any for that to happen. Overbought conditions have dominated since the middle of last month although buying volume in February so far has been particularly high.

$2,900 doesn’t seem yet to be a very significant area but the price might find some support around the 20 SMA before any potential test of $2,800. That would mean quite a deep retracement which seems somewhat questionable in the circumstances of such positive sentiment and high demand. $2,850 could be a zone of strong demand depending on upcoming political news; under the current circumstances an immediate new high is unlikely.

Muted Reaction to Inflation from Euro-dollar

Euro-dollar declined somewhat in the aftermath of slightly stronger American inflation but with relatively low volatility. Central banks’ expected policies in the next few months broadly favour the dollar, but the impact of the trade war is more ambiguous.

With $1.02 and $1.05 looking like important areas of support and resistance respectively, EURUSD might be falling into a sideways trend, which is a fairly normal situation for a major forex pair. The slow stochastic is closer to neutral than oversold and there’s no signal of saturation from Bollinger Bands.

Although there was a large spike in buying volume on 3 February after that weekend’s gap, there wasn’t much momentum upward after that except to close the gap. Traders are now looking ahead to various European releases including German inflation and eurozone-wide jobs and GDP, followed by ZEW sentiment on 18 February.

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

The opinions in this article are personal to the writer. They do not reflect those of Exness or FX Empire.