US Dollar Index News: DXY Rises with August’s Core Inflation Spike

Highlights

• US Dollar (DXY) benefits from August’s inflation spike.
• Sterling weakens amid UK’s economic contraction.
• European Central Bank’s decision could reshape Euro.

Overview

Dollar’s Movement Amid US Inflation

The US Dollar Index (DXY) maintained minor gains on Wednesday following the revelation that U.S. inflation accelerated in August. However, this spike in inflation had more subtle implications beneath the surface, potentially allowing the Federal Reserve to maintain interest rates during their upcoming meeting. The major drivers of this inflation surge were largely attributed to a significant jump in energy commodity prices, particularly gasoline.

Federal Reserve’s Upcoming Decisions

Despite the rise in headline inflation, underlying pressures were more subdued. This deviation can be challenging for the Fed, requiring them to reconcile perceived inflation at consumer points, like gasoline pumps, with more modest overall inflation trends. With their next policy decision scheduled after the September 19-20 meeting, all eyes are on the Federal Reserve’s interpretation of these economic indicators.

The Sterling’s Woes

The pound exhibited weakness against the dollar, primarily due to the contraction of Britain’s economy. This decline was the steepest observed in seven months, exacerbated by strikes and unfavorable weather affecting output. With the Bank of England having increased interest rates 14 times since December 2021, culminating in a 15-year peak of 5.25%, market traders anticipate an 80% likelihood of another rate hike in the upcoming meeting. The decline of the pound against the dollar seems inevitable, especially given the lackluster outlook on the UK’s economy.

US Economy’s Strong Stand

The US economy remains robust, with indicators like a steady labor market and a consistent GDP growth rate of 2% per quarter. When juxtaposed with the UK’s economic outlook, the US paints a picture of stability and growth. This disparity, combined with other external factors like strikes and inclement weather affecting the UK’s retail and construction sectors, further justifies the market’s inclination towards the dollar over the pound.

Eye on the European Central Bank

In the European region, the Euro held its ground against the US inflation data. With a looming expectation of the European Central Bank leaning towards a rate hike, and recent revelations suggesting that the ECB predicts an inflation rate above 3% for the next year, the Euro’s future looks intriguing. However, while some experts anticipate a hawkish stance by the ECB, others believe soft growth could deter further hikes. This meeting’s outcome could very well reshape European forex dynamics.

Technical Analysis

Based on the 4-hour data for the US Dollar Index (DXY), the DXY has seen a minor decline, moving from 104.738 to its current price of 104.576. At this juncture, the DXY is positioned above its 200-4H moving average of 103.452, yet it remains below the 50-4H moving average, which stands at 104.658. The 14-4H RSI reading of 46.11 indicates a weakened momentum, but it’s not in the oversold territory.

With the current price sandwiched between the main support area (104.699 to 104.403) and the main resistance zone (105.095 to 105.883), market sentiment appears neutral to slightly bearish.