The US dollar appears to be holding its ground despite a tumultuous 18 months marked by rising interest rates, a struggling commercial real estate market, and mounting losses for regional banks. Despite concerns about a potential banking crisis, the US economy continues to show resilience. This prompts the question: How is this possible?

The Federal Reserve's ongoing cycle of interest rate hikes was expected to cool down the US economy, but American consumers think differently. Inflation in the country is easing at a slower rate than anticipated. Coupled with historically low unemployment rates and leftover pandemic savings, household spending has consistently surpassed expectations, driving the economy forward.

Recent CPI data revealed that annual inflation dropped to 3.1% in January from the previous month's 3.4%, surpassing analysts' expectations of 2.9%. Despite the downward trend in consumer prices, the higher-than-expected figures sparked concerns about the timing of potential interest rate cuts by the Federal Reserve.

The inflation data sent shockwaves through the market, leading to a decline in demand for safe-haven assets like gold. XAUUSD plummeted from $2,030 to around $1,990 per troy ounce, hitting a two-month low and struggling to recover.

XAUUSD Chart by TradingView

Gold demand waned as traders adjusted their positions to favor a stronger dollar. Although the dollar initially gained ground following the CPI data release, it later relinquished some of its gains judging by the DXY chart.

DXY Chart by TradingView

However, the dollar stands to benefit further as other major central banks in England and Europe consider accelerating their rate-cutting plans, even as the Federal Reserve maintains its current stance.

With inflation still posing a threat to the US economy, the Federal Reserve is likely to proceed cautiously before implementing interest rate cuts. The slight miss in inflation figures has made the prospects of a rate cut in May less certain. Nevertheless, there is still time for the three rate cuts projected by the Fed this year. As long as interest rates remain high, the US dollar should continue to fare well.