Early in the London session on Tuesday, the dollar shed some of the Asian market profits as the general market sentiment focuses on inflation expectation in the US. Meanwhile, the US stock market jumped to fresh highs as Gold plummets to its lowest in nearly one week. However, US bond yield broke out of a technical neckline.
Fed officials continue to play down on inflation and this seems to be the center of the market sentiment alongside employment reports. The US dollar is being pressured in recent weeks as inflation expectation declined. Rising inflation expectation could spark a bullish reaction on the dollar and thus pressure equities and high-beta assets. The opposite happens when the inflation rate improves. The US inflation rate currently stands at 1.7%. Meanwhile, top Fed officials expect a surge to 2% or even higher in the coming months as the Federal Reserve remains steadfast in its current easing policies.
As the chart above shows, the inflation expectations in the US surged to 3.2% (highest since 2014) in March from February’s 3.09%. On the other hand, the annual inflation rate rose to 1.7% in February from 1.4%. This is the highest in a year. It remains to be seen whether the Fed will worry about these inflation figures or continue to hold its ground. The market expects higher US CPI data for March. CPI consensus at 0.5% against 0.4% previous and core CPI consensus at 0.2% against 0.1% previous.
Effect of rising inflation – rising US bond yield?
The inflation rate and expectations are good barometers for the US bond yield. The US 10-yr yield rallied to 1.78% in late March having grown over 93% since the turn of the year as the government played down on inflation despite the expected resurgence in the global economy. As the chart above shows, the yield is perhaps about to fly to a new high again. This is the longest bearish dip since February when the latest inflation data were released. If the US CPI data comes higher than expected, we should see the surge continue above 1.8% in the coming days.
Will Gold plummet toward 1700 on rising yield?
Gold rises and falls, more often than not, with rising and falling yield. A rising yield should see the yellow metal plummet further.
The metal surged from 1675 to 1765 between March and last week. The current dip is expected to continue toward the 1700 psychological level. A fresh low below 1675 shouldn’t be written off as the bounce from 1675 looks corrective. The long-term correction should resume if the non-yielding commodity falters to 1700. However, a fast surge above the yellow trendline up to 1740 is a sign of caution.
What next for the dollar? – DXY technical outlook
The dollar started the year in a bright mood – correcting about a third of the March-December 2021 decline. The long-term bearish impulse wave seems to have completed at 89.22 (30-month low). The chart below shows the corrective resurgence of the dollar index.
After completing a double zigzag pattern in late March, the dollar has been on the decline in April. However, the decline is slow and shallow thus raising suspicion of a more complex corrective structure. The current dip is expected to be the wave X of a larger bullish double zigzag pattern. While a decline to 91 is very much likely before further rallies above 95, we might see 92 providing support for a bounce to 92.5 prior. With the bond yield gearing to rise higher, we might see the dollar rally most likely at a slower pace as divergence between the two instruments could occur at some stage.
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