A neutral trend with a bullish tendency seems more logical
After a two-week decrease, USD closed 0.13% higher than its open price last week. Last week the dollar index fell as low as 105.30 during the week but recovered later to close the week near the 107 level. In line with the US dollar, treasury yields also were decreasing in the last weeks, but last week and while the USD closed higher, yields on the US 10-year bond dropped from 3.9% to 3.8% on Friday. After recently published data in the past few weeks, especially with cooling CPI and then PPI, while the labor market also is not as good as before, expectations from Fed to slow down the rate hike pace increased, and it is the main reason to put the pressure on US bond yields.
According to the published data, consumer inflation in October rose by only 0.4%, much less than 0.6% estimates, with 7.7% annual CPI, compared to 8.2% the previous month and the 7.9% expected. On the producer front, inflation increased only 0.2% in October, which is twice less than the market estimate. And Monthly Core PPI, which excludes food and energy, with a 0.3% rise, was just 0.1% more than in September and is in line with estimates.
These data confirm that US inflation is cooling faster than expected, and it caused the dollar to plummet, however, recent comments from the Fed officials changed the market sentiment. Most Fed speakers emphasized that it is still too early to change the policy and they agree on continuing the tightening policies. Market participants are currently expecting between a 50-bps and a 25-bps interest rate increase in December, and mostly pricing on 50-basis points. Fed’s Susan Collins stated on Friday that a 75-bp hike is still on the table, a 50-bp move would also be considered a large increase.
On the economic calendar, I have to remember that last week Philly Fed Manufacturing Index in October fell short of expectations on Thursday. Initial jobless claims dropped to 222K from 226K last week and are against expectations of 228K. Core retail sales raised by 1.3% in October, more than 0.5% estimates, and higher than September’s growth of 0.1%. Industrial production also in October fell by 0.1%.
In the week ahead, we have several important data to be released which can cause high volatility in the DXY chart. Flash Services and Manufacturing PMI data will be released on Wednesday, 23rd. The minutes of the latest FOMC meeting is also scheduled to be released on the same day and for sure will affect the dollar price. In line with economic data, we should also not forget about the Fed speakers.
From the technical point of view, DXY bears faced strong support at 105.30. While in the Daily chart US dollar index moves in a clear downtrend, in the H4 chart, we can see it has been challenged and in the H1 chart, it is more volatile. 107 seems like a pivot point and holding above this level, can support the bulls, but the uptrend can start above 20 DMA at 109.12. Trading under 107 also can strengthen the bearish theory, especially if it falls below 105.30.
