DXY: Weakness in the DXY Could be Short-Lived

Major U.S. equity indices are hovering at all-time highs this week as investor sentiment received a boost from the latest inflation data. In response, U.S. treasuries, as well as the U.S. Dollar Index (DXY), have been ticking lower this week. However, the weakness in DXY could be short-lived.

Don’t Overlook Inflation Just Yet

The DXY has moderated by 0.69% over the past five sessions and is down by nearly 1.6% over the past month. In April, the consumer price index (CPI) came in at 0.3%, marking a cooling trend for the first time in six months. This inflation print has buoyed sentiment for a softer stance from the Fed, with some quarters of the market once again hoping for a rate cut in the near term.

However, if the data surprises and the subsequent scaled-back rate cut expectations over the past few months are any indication, the higher-for-longer scenario may not dissipate soon. While the CPI print for April moderated from the prior 0.4% reading, a rate cut in the next 2-3 months is highly unlikely. Even if the economy shows signs of slowing, the risks of stagflation persist. Factor in the potential for any surprise geopolitical shocks this year, and it’s safe to assume that the Fed’s wait-and-watch approach will likely continue.

J.P. Morgan Chief Jamie Dimon rightly pointed out this week that the markets may be underestimating inflation. Speaking to Bloomberg, Dimon noted that factors such as the push for the green economy, infrastructure, and rising military spending contribute to inflation. Additionally, geopolitical developments such as the Red Sea crisis leading to higher supply chain costs are ever-present. Recent comments from Fed Chair Jerome Powell also signal that the Fed’s monetary tightening stance could extend into 2025.

Is the U.S. Dollar Getting Stronger or Weaker?

As a result, the U.S. Dollar could continue to display bouts of strength, and the moderation in the DXY may not get extended.

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