Dollar selling opportunity? – Cash for clunkers – 10.5% more cash than one year ago, and that is the main driver behind accelerating US inflation. Had prices of used cars remained unchanged, the headline Consumer Price Index would be roughly 3.6%, not 5.4% as reported. Core CPI would also be substantially lower than the 4.5% YoY reported for June.
Dollar selling opportunity?
Why are second-hand vehicle prices on the rise? Americans have spare cash saved during the pandemic and boosted with stimulus checks. More importantly, they are able to drive much more than beforehand as the economy reopens. Some prefer buying new cars, but these are often out of reach due to the global chip shortage. The fast reopening has boosted prices – transitory inflation.
Dollar selling opportunity?
- The US has reported a 5.4% headline increase, higher than expected
- One-third of increases are due to a 10.5% leap in costs of used cars.
- The dollar’s leap could prove temporary, also due to other factors.
However, markets move first, ask questions later. The dollar has reacted with a knee-jerk reaction to the upside, but bond markets seem relaxed, with 10-year Treasury yields hardly moving at 1.37%. This could prove as an early sign that markets are having a rethink – but they also await the testimony by Federal Reserve Chair Jerome Powell on Wednesday.
Apart from clunkers, higher CPI was also driven by surging costs of hotel stays, car rentals, airfares, and also apparel – which was in low demand while many worked from their home offices with pajamas.
These explanations may sound like excuses to those fearing that the mix of monetary and fiscal stimulus has gone too far and is set to trigger uncontrollable inflation. How long can doubters make excuses? Fed Vice Chair Richard Clarida said that if prices pressures persist through year-end, he would have to dismiss the theory of transitory inflation. However, that could come sooner.
Apart from Powell’s upcoming testimony, another quicker development is the spread of the Delta COVID-19 variant. After falling sharply, US infections have nearly doubled in the past two weeks. If cases continue rising quickly – as they have in the UK – it could serve as a headwind to the reopening. Lockdowns are unnecessary to cool down inflation.
Overall, this inflation-induced dollar surge may prove temporary – despite the current surge.
Dollar stays tight, building up strength for breakout
Moderately positive stock market dynamics yesterday was combined with a slight 0.1% increase in the dollar index to 92.2 after two days of decline from 92.8.
The Dollar Index is now near the upper end of the converging trading range since last October. Also, a pullback is forming on the daily charts after touching the overbought area of the RSI index.
Therefore, the short-term technical picture is now on the side of the dollar bears, suggesting a further correction after last month’s rally. Also, falling long-term bond yields are playing against the dollar. In contrast to last week, this move is increasingly linked to easing inflation fears and central bank actions pushing interest rates, including 120bn monthly Fed purchases.
At the same time, it is worth separating the short-term momentum from the longer-term trend. The latter could well be on the side of the dollar as the US economy recovers more strongly, and the Fed could prove to be the flagship of monetary policy normalisation.
Globally, the dollar has remained without a pronounced trend, forcing a closer look at the latest extremums. A firm break beyond these levels would be a signal for a further move in the breakout direction.
Short-term downward momentum is more plausible, causing us to look closer to the 200 SMA, which passes through 91.35. A decisive break below this level would open the way towards 89.60, the lower boundary area narrowing the trading range. Only a break of this area would revive bets on a global multi-year dollar decline.
The US advance on the stimulus rollback and solid economic growth leaves a moderately bullish scenario for the dollar on the table, whereby a pullback of the DXY to the 200-day average would once again attract buyers.
A slight pullback in the dollar might draw the buyers, ending a long consolidation by breaking through the upper 92.7 range boundary. A break-up will be confirmed by a move above 93.4 (previous peak area).
The balance between the bulls and the bears is very tight due to the pandemic heightened uncertainty. However, traders and investors should note that a prolonged consolidation leads to a compressed spring effect: the longer the range is compressed, the stronger the subsequent trend in the direction of the breakout will be.
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