- USD Analysis: Dollar Index Tests Key Supports as Focus Shifts to PPI Inflation Following CPI Rise Earlier This Week
- USD weakened on Thursday’s weak retail sales, but higher import costs lead to inflation
- The week ahead features global PMIs along with some other macro data
Welcome to another edition of Forex Friday. This is a weekly report focused on selected currency themes. This week’s report discusses the USD, upcoming data coming out of the US next week, and provides an outlook for next week.
US dollar analysis: dollar priced in ahead of key data
The dollar was little changed through mid-morning European trading as markets were closed for President’s Day on Monday, marking a long weekend for North American investors ahead of the release of key PPI inflation data. Gains in currencies such as USD/JPY and USD/CHF were offset by slightly stronger EUR/USD. The macro calendar is likely to be light over the next week, and the dollar may remain sideways, but remain relatively strong.
Before we discuss today’s upcoming PPI data release in more detail and turn to next week, let’s take a quick look at the chart of the Dollar Index to remind us of the dollar’s general direction.
US Dollar Analysis: Key Support for Dollar Index Test
Source: TradingView.com
Ahead of the PPI data, the dollar index has now reached a key support zone around the 104.26-104.00 area. The upper limit had become a resistance level earlier this week, but it succumbed after a grim inflation report. This level also coincides with the December high. To maintain bullish momentum, DXY must remain above this important range. Failure to do so would signal a bearish outlook, especially given the robust inflation data released on Tuesday. Personally, I think this week’s low of 103.90 is the decisive level. A break below this point could establish a lower low and invalidate the near-term bullish technical outlook.
Assuming the above support area remains intact, the dollar index could rise to the low from Wednesday at 104.65. Subsequent bullish objectives include 105.00 above this week’s high, followed by 105.65, which has previously served as support.
Focus shifts to PPI inflation
The Producer Price Inflation Report, combined with the University of Michigan’s Consumer Inflation Expectations, will provide additional insight into the U.S. inflation picture. A steady disinflationary narrative in recent months has helped fuel strong gains in stock prices while capping dollar appreciation. Oddly enough, traders have consistently increased their bets on the Fed cutting rates, even though the data remains strong. However, seeing an unexpected rise in PPI inflation could strengthen the case for the Fed to delay cutting rates, leading to higher yields and a stronger dollar.
PPI is expected to rise 0.1% month-over-month on both a headline and core basis. On a year-on-year basis, PPI is expected to be 0.6%, down from 1.0% previously, while core PPI is expected to be 1.6% versus 1.8% previously.
Meanwhile, the Michigan Consumer Sentiment Report is expected to show a slight improvement to 80.0% from the previous 79.0%, although whether inflation expectations will show a noticeable change from the 2.9% previously reported. Attention!
US dollar analysis: Rising import costs cause inflation
Signs of sustained inflation are widespread. As revealed on Thursday, the sharp 0.8% month-on-month rise in import costs last month was mainly due to the rise in oil costs. This was the largest increase since March 2022, but the revised 0.7% decline from zero the previous month suggests the data may not be as worrying as the headlines suggest. Nevertheless, the unexpected rise was noteworthy. The development comes after last month’s CPI data revealed that price pressures have eased less than expected. With inflation pressures slow to subside, yields could remain high for an extended period of time, putting pressure on low-yielding currencies such as the yen and franc.
Retail sales hit USD
Thursday’s weak retail sales data hurt the US dollar, which further weighed on Tuesday’s CPI-related gains. However, it is premature to discuss a dollar ceiling as a rebound is likely given the dollar’s long-term bullish trend, recent strong economic data from other sectors, and a hawkish Fed stance. The weakness in retail sales, which have consistently exceeded expectations over the past six months, may be an anomaly. Additionally, import costs recorded their largest rise in nearly two years in January, potentially halting the disinflationary process, which could prompt a cautious Fed following reports of higher inflation. There is. As a result, the likes of USD/JPY could move above 150.00 in a more meaningful way and break out of the two-year resistance around 152.00, while EUR/USD trades near resistance around 1.0780-1.0800. It has made a decent comeback and could move back towards 1.0700. area. Although the dollar has weakened a bit recently, strong CPI data supports buying on the dollar as talk of an early interest rate cut in March recedes and uncertainty rises over a May rate cut. Suggests. Today’s PPI report could provide further insight into the US inflation situation.
The number of new jobless claims reported on Thursday was higher than expected, and manufacturing indexes in Philadelphia and New York were also better than expected. However, weak industrial production and retail sales have weakened the dollar, and as mentioned above, this trend is unlikely to persist. Major retail sales fell 0.8% and core sales fell 0.6%, both below expectations. Industrial production also decreased by 0.1% from the previous month.
For next week
With US markets closed on Monday for President’s Day and most of the major data releases coming in the previous week, the week ahead will feature some less important macro highlights aside from a few items discussed below. will be taken up.
Canadian CPI
Tuesday, February 20th
Canada’s annual inflation rate rose to 3.4% from 3.1% in December, in line with expectations. This is in line with the Bank of Canada’s forecast that inflation will remain elevated at around 3.5% for an extended period of time, potentially avoiding interest rate cuts for an extended period of time. The increase was due to soaring gasoline prices, which led to a rebound in transportation and housing prices, including rent and mortgage rates. Passenger car prices also rose. With US inflation not falling as much as expected, will there be a positive surprise in Canadian CPI?
FOMC Minutes
Wednesday, February 21st
In January, the Federal Reserve kept its policy interest rate unchanged at 5.25% to 5.5%. Mr. Powell and his FOMC colleagues emphasized that they are reluctant to cut rates until they are confident that inflation will reach 2% sustainably. The Fed chair hinted at the possibility of a rate cut before the end of the year, but expressed skepticism about a rate cut in March. The Fed noted an improvement in the balance of risks and omitted any further rate hikes, but remained prepared to adjust policy as necessary as inflation continues to be high. Let’s see if the meeting minutes reveal any notable surprises we don’t know yet.
Global PMI
Thursday, February 22nd
Among the global PMIs to watch on Thursday will be those in Germany and the eurozone, whose economies are struggling, with growth well below the pace observed in the United States. While this hasn’t stopped the DAX from hitting new all-time highs, and almost all mainland European indexes are doing relatively well, EUR/USD has been on a downward trajectory in recent months. However, if we start to see improvement here, EUR/USD may start to find much-needed support.
— Written by Market Analyst Fawad Razakzada
Follow Fawad on Twitter @Trader_F_R
