US Dollar Index (DXY) holds steady near 101.70 as markets await US CPI report amid uncertainty over Iran

Support from several factors helps DXY halt its overnight decline.
Conflicting messages on US-Iran peace negotiations sustain the geopolitical risk premium.
Expectations of a Fed rate hike lend additional support to the USD before the US CPI release.

With traders awaiting clarity on the Middle East crisis and US consumer inflation data, the US Dollar Index (DXY) holds near 101.70 in Tuesday's Asian session. The index, which measures the Greenback against a basket of currencies, remains in consolidation.

Safe-haven demand continues to support the US Dollar (USD), as conflicting accounts of efforts to end the Iran conflict sustain the geopolitical risk premium. US President Donald Trump described positive momentum towards ending the war on Iran, said renewed strikes were quite unlikely and declared the conflict effectively over. By contrast, Mohsen Rezaei, Secretary of Iran’s Supreme National Security Council, rejected reports of ongoing negotiations as fake news. He reiterated that Washington must agree to Tehran's seven conditions for ending the conflict.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

Expectations of an imminent interest rate increase by the US Federal Reserve (Fed) were reinforced by last Friday's strong US Nonfarm Payrolls (NFP) report. Traders now assign a probability of over 80% to another increase in borrowing costs in December, according to the CME Group's FedWatch Tool. While these expectations offer further support to the DXY, bullish traders are holding off on fresh positions until the US Consumer Price Index (CPI) report is released.

For further indications of the Fed's policy trajectory, investors will scrutinise the key inflation release. Geopolitical news will also be an important driver of near-term USD movements and could give the DXY meaningful direction. Until then, the fundamental factors outlined above call for caution among bearish traders considering positions for a further decline.

Inflation: Key Questions Answered

How is inflation measured?

A rise in the cost of a representative basket of goods and services is measured as inflation. The headline figure is generally reported as a percentage change, both month-on-month (MoM) and year-on-year (YoY). To calculate core inflation, more volatile components, including food and fuel, are excluded because their prices can shift with geopolitical developments and seasonal conditions. Economists concentrate on this core measure, which also serves as the target for central banks. Their mandate is to maintain inflation at a manageable rate, typically around 2%.

What does the Consumer Price Index (CPI) measure?

Changes in the cost of a basket of goods and services over time are captured by the Consumer Price Index (CPI). The index is generally reported as a percentage change on both a month-on-month (MoM) and year-on-year (YoY) basis. Central banks target Core CPI, which removes volatile food and fuel components. A Core CPI reading above 2% usually leads to higher interest rates, while a reading below 2% tends to produce the reverse. As higher rates support a currency, rising inflation generally strengthens it. Falling inflation typically has the opposite effect.

How does inflation affect currency values?

A country's currency tends to appreciate when inflation is high and weaken when inflation is lower, a relationship that may appear counter-intuitive. The explanation lies in the central bank's usual response: it raises interest rates to curb higher inflation. Those higher rates draw additional global capital from investors seeking attractive returns on their funds.

Why does inflation affect Gold prices?

Historically, investors sought Gold during periods of high inflation because it retained its value. Its safe-haven appeal still often attracts buyers during severe market turmoil, but that pattern does not hold most of the time. The reason is that central banks respond to high inflation by raising interest rates. When rates rise, holding Gold carries a greater opportunity cost compared with owning an interest-bearing asset or keeping funds in a cash deposit account, which weighs on Gold. Conversely, lower inflation generally benefits Gold by bringing interest rates down and making the precious metal a more attractive investment alternative.