The U.S Dollar Index (DXY) is tracking 0.11% lower today and has declined by 0.25% over the past five days. Yet, a slew of macroeconomic data and the global geopolitical upheaval could strengthen the dollar in the short term.
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First, the U.S. and the UK launched a major offensive against the Houthis in Yemen as the rebels showed no signs of scaling back their attacks in one of the most crucial logistics arteries of the world. This means the dollar will be increasingly looked at as a haven of safety by investors once again.
Second, the surge in inflation in the past few years was partly a result of global logistics bottlenecks. Amid the Red Sea attacks, shipping companies are preferring longer routes for safety, which means higher prices. Additionally, this could have an impact on production. Tesla’s (NASDAQ:TSLA) shuttering of a plant in Germany is a case in point. Oil has already soared by over 2% today.
Third, the CPI rose by 0.3% in December. The figure came in higher than the Street’s expectations. Core CPI also rose by more than estimates, and Core PPI remained unchanged. This indicates a subdued case for the rapid rate cuts markets priced in going into 2024.
These factors could force the Fed to continue with its tight policy stance for slightly longer than the market’s expectations, as its 2% inflation target seems a bit farther away now. In an interview with Bloomberg TV, Loretta Mester, the President of Cleveland Fed, noted that the latest CPI print shows that “There is more work to do and that work is going to take restrictive monetary policy.”
Meanwhile, major support for DXY can be expected at the 101.68 level.
Source: TradingView
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