After last week’s upbeat employment data, attention now shifts to upcoming US inflation figures.- The recent surge in the US dollar halted following mixed PMI data, hinting at potential volatility ahead of the CPI release.
- This week’s CPI data is poised to sway market sentiment surrounding the US dollar, as it will play a key role in the Fed’s decision to cut rates this year.
After last week’s employment data, the spotlight shifts to US inflation numbers this week.
Last week, the labor market data boosted the US dollar, halting its decline post-labor data. However, investors grappled with mixed data later on, with PMI indicating a slowdown in service sector growth despite employment gains.
This week, the US CPI data is set to spark a directional move in the US dollar.
US Dollar Index: Technical View
The dollar, which began to decline from the 105 level, stabilized after finding support at 104. The direction of the dollar in the short term hinges on inflation data due this week.
If inflation surpasses expectations, mirroring the trend of the previous two months, it may reinforce the market perception of a more hawkish Fed policy.
This could lead to fewer anticipated rate cuts this year. If the first half of the year follows the trajectory of the first quarter, there might even be speculation of the Fed refraining from interest rate cuts this year.
DXY Price Chart
Fed members have recently expressed caution regarding rate cuts, prioritizing inflation over employment.
The upcoming announcement of March inflation figures, scheduled for Wednesday, will likely serve as a crucial test for the dollar. If inflation surpasses expectations, it could give the Fed an excuse to postpone rate cuts.
While the US economy maintains its strength, other developed nations grapple with more challenging economic conditions.
This dynamic increases the likelihood that the US Federal Reserve will lag in the interest rate cut cycle, which has already commenced with actions by the Swiss National Bank and is anticipated to continue with the European Central Bank.
Such a stance suggests that dollar yields may remain elevated for a longer duration, leading to a potential appreciation of the dollar against major currencies.
Currently, the DXY has commenced the week on a positive note above the 104.2 level, where it found support last week. The dollar turned upwards in the initial week of March, confirming a limited correction.
Presently, the dollar could move within an upward channel, as the daily chart shows support at the lower band of the channel during last week’s pullback.
If March inflation remains resilient, it could prompt the index to retest the 105 level initially, supporting the dollar, and potentially advancing towards the 106 level, depending on movements within the channel.
Alternatively, a support level at 104 is key, with the likelihood of accelerated dollar sales increasing if there is a downward break below 103.75.
