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Inflation at 40-year highs: dollar, gold, bitcoin react

By Piero Cingari

15:45, 10 February 2022

US dollar banknotes, gold and bitcoin
US annual inflation rose at the highest pace in 40 years and above than market expectations – Photo: Shutterstock

Annual inflation soared 7.5% in January 2022, the fastest pace in 40 years and above market expectations of 7.3%, the US consumer price index (CPI) showed.

Excluding food and energy, core inflation climbed to 6%, the highest rate since September 1982, due to broad-based price increases in nearly all components of the basket, prompting concerns that inflation may become more entrenched in the economy for an extended period.

The financial markets reacted. Investor expectations increased dramatically for the US Federal Reserve (Fed) to tighten monetary policy more aggressively this year, resulting in robust price movement across all major asset classes.

a chart showing headline and core inflation rate in the USUS headline and core CPI (%change y/y) – Credit: Capital.com / Source: Tradingview

Expectations of 50 basis point hike in March spiked

A 50 basis point (bp) increase in interest rates by the Fed in March is now more likely than not according to the latest CME Group FedWatch tool from CME Group.

Fed futures prices currently assign a 54% likelihood of a 50bp raise in the March Fed meeting, up from 23% before the CPI figure, implying that investors are now effectively pricing in a 39bp rate rise in March.

Expectations for total Fed rises in 2022 have also climbed, with the market now pricing in 154bps (or fully discounting six cumulative hikes) by the end of the year, up from 130bps before to the CPI release.

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a chart showing market expectations for rate hikes in 2022Market implied interest-rate rate hikes in 2022 – Credit: Capital.com / Data: CME Group

US Dollar response after the US CPI: technical analysis

The dollar initially responded positively in the forex market, with the DXY index hitting the psychological barrier of 96.00, the highest since 3 February, but then retracing to 95.30 at the time of writing (-0.2% on the day).

Higher interest rate expectations in the US make the dollar more appealing in comparison to other currencies, but the risk of consistently higher rate inflation than the cost of borrowing in the economy is a component of weakness for a currency.

Technically, the DXY index bounced back on resistance at 95.96 (the 50-day moving average and 38.2% Fibonacci retracement level from 28 January highs), a symptom that at that level there was a loss of impetus of the bulls. The next support is around 95.13 (4 February lows), where demand for the US dollar may possibly resurface.

a chart showing technical analysis on dollar after inflationUS Dollar (DXY) technical analysis post CPI print – Credit: Capital.com / Source: Tradingview

Gold response after the US CPI: technical analysis

Following the announcement of US inflation data, gold spot first fell, reaching an intraday low of $1.822 per ounce, before rebounding to $1,835, trading flat on the day.

AUD/USD_zero

0.66 Price
-0.610% 1D Chg, %
Long position overnight fee -0.0065%
Short position overnight fee -0.0017%
Overnight fee time 21:00 (UTC)
Spread 0.00006

EUR/USD

1.09 Price
+0.060% 1D Chg, %
Long position overnight fee -0.0087%
Short position overnight fee 0.0005%
Overnight fee time 21:00 (UTC)
Spread 0.00006

AUD/USD

0.66 Price
-0.610% 1D Chg, %
Long position overnight fee -0.0065%
Short position overnight fee -0.0017%
Overnight fee time 21:00 (UTC)
Spread 0.00006

GBP/USD

1.29 Price
+0.220% 1D Chg, %
Long position overnight fee -0.0046%
Short position overnight fee -0.0036%
Overnight fee time 21:00 (UTC)
Spread 0.00013

Non-yielding assets like gold and metals are negatively affected by the prospect of increased interest rates, but the growing risk of entrenched inflation in the economy leading to possible stagflation might fuel a rise in demand for gold and other safe haven assets.

Technically, gold is getting closer to test the next level of resistance at the $1,838 area (78.6% Fibonacci retracement level from 25 January highs). Breakouts above this level may raise chances to look towards $1,854.

On the daily chart, the 50-day moving average trades at the same level as the 200-, and an upward crossing would result in the formation of a "golden-cross" pattern, which might act as an extra technical factor in favour of the bulls.

a chart showing technical analysis on gold following US CPI printGold technical analysis – Credit: Capital.com / Source: Tradingview

Bitcoin response after the US CPI: technical analysis

BTC/USD touched an intraday low of $43,200 following the CPI announcement, before beginning a rally above the psychological milestone of $45,000.

The largest cryptocurrency by market size is now down only 2% year-to-date, recovering about 37% from January lows.

Fears of a more aggressive fed monetary policy could negatively impact assets that are more sensitive to market risk sentiment, such as cryptocurrencies, as it would reduce market liquidity.

However, over the past year bitcoin has had a positive correlation with market inflation expectations (US Breakeven rates), indicatiing that investors are fleeing to alternative assets, such as bitcoin and other cryptocurrencies, in times of rising inflationary risks.

Technically the level of $43,500 (100% Fibonacci retracement) could now represent a new support for the cryptocurrency, while the immediate level of resistance is given by the psychological level of $46,000, which was the support in early January). A break above this level could suggest an extension to $50,000 (161.8% Fibonacci retracement).

a chart showing technical analysis on bitcoinBTC/USD technical analysis – Credit: Capital.com / Source: Tradingview

Markets in this article

BTC/USD
Bitcoin / USD
67793.15 USD
-50.1 -0.070%
Gold
Gold
2395.69 USD
-5.13 -0.210%
DXY
US Dollar Index
103.895 USD
-0.05 -0.050%

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The difference between trading assets and CFDs
The main difference between CFD trading and trading assets, such as commodities and stocks, is that you don’t own the underlying asset when you trade on a CFD.
You can still benefit if the market moves in your favour, or make a loss if it moves against you. However, with traditional trading you enter a contract to exchange the legal ownership of the individual shares or the commodities for money, and you own this until you sell it again.
CFDs are leveraged products, which means that you only need to deposit a percentage of the full value of the CFD trade in order to open a position. But with traditional trading, you buy the assets for the full amount. In the UK, there is no stamp duty on CFD trading, but there is when you buy stocks, for example.
CFDs attract overnight costs to hold the trades (unless you use 1-1 leverage), which makes them more suited to short-term trading opportunities. Stocks and commodities are more normally bought and held for longer. You might also pay a broker commission or fees when buying and selling assets direct and you’d need somewhere to store them safely.
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