US Dollar Attempts Recovery as CPI Data Aligns with Expectations
The US Dollar (USD) is attempting to recover after a modest decline, following the release of the July Consumer Price Index (CPI) data. The CPI numbers came in exactly as anticipated, offering no surprises, which led to a muted market reaction. This outcome has been somewhat disappointing for traders who had positioned themselves for a more dramatic shift in the USD, particularly after the softer-than-expected Producer Price Index (PPI) data released earlier this week.
Market Reaction to CPI Data: A Mixed Bag
The USD’s initial response to the CPI data was to erase some of the earlier losses, though the overall market reaction has been subdued. The CPI data showed a slight increase in core inflation, with the monthly core CPI rising by 0.2%, up from 0.1% in June. However, the yearly core CPI softened slightly to 3.2%, down from 3.3%. Meanwhile, the headline CPI remained unchanged at 0.2% month-over-month, and the annual headline inflation rate decreased to 2.9% from 3.0%.
These figures indicate that inflationary pressures in the US economy are stabilizing but not accelerating, which may be why the market’s reaction has been relatively contained. The data provided little new information to alter the Federal Reserve’s (Fed) current monetary policy stance, leaving traders to focus on upcoming economic data to gauge the next possible moves by the Fed.
US Dollar Index (DXY) Technical Outlook
From a technical perspective, the US Dollar Index (DXY), which measures the value of the USD against a basket of six major currencies, continues to trade in the mid-102.00 range. The DXY recently pulled back from the crucial 103.18 level, a pivotal point that has been a significant resistance level in recent days. This retreat was largely influenced by the unexpected PPI data on Tuesday, which spurred concerns about the strength of the US economy and the likelihood of future rate cuts by the Fed.
If the DXY fails to hold above 103.00, further downside pressure is likely. The index may need to decline further to pull the Relative Strength Index (RSI) into oversold territory, which could provide the necessary support for a potential rebound. Immediate support is seen near the August 5 low at 102.17. A breach of this level could open the door for a test of the psychological 102.00 mark, followed by 101.90, which was a key support level in December 2023 and January 2024.
On the upside, the DXY needs to break above the 103.18 resistance level to reignite bullish momentum. If this level is successfully cleared, the next target would be 104.00, with the 200-day Simple Moving Average (SMA) at 104.12 posing a significant hurdle in the near term.
DXY Daily Price Chart
Source: TradingView, prepared by Richard Miles
Economic Data Calendar: What’s Next?
With Wednesday’s CPI data now in the rearview mirror, traders are shifting their focus to the upcoming economic releases that could have a more significant impact on the market. On Thursday, the US Retail Sales data for July will be released, alongside the weekly jobless claims. These figures are likely to draw increased attention, especially given the lack of a strong market response to the CPI data.
Retail sales are a key indicator of consumer spending, which accounts for a significant portion of US economic activity. A strong retail sales report could bolster expectations for the US economy’s resilience, potentially supporting the USD. Conversely, weak retail sales could exacerbate concerns about economic slowdown, increasing the likelihood of more aggressive rate cuts by the Fed.
The weekly jobless claims report will also be closely watched. While the US labor market has remained relatively robust, any signs of weakening could add to the bearish sentiment surrounding the USD, particularly if coupled with soft retail sales data.
Global Developments Impacting the USD
In addition to domestic economic data, global developments are also playing a role in shaping the USD’s trajectory. In Japan, Prime Minister Fumio Kishida has announced that he will not seek a second term, creating political uncertainty in the country. This news has added to the volatility in the Japanese Yen (JPY), although its impact on the USD has been limited so far.
Meanwhile, the Reserve Bank of New Zealand (RBNZ) surprised the market on Wednesday by cutting interest rates by 25 basis points, signaling the start of a new easing cycle. RBNZ Chairman Adrian Orr even hinted that a 50 basis point cut was considered, which sent the New Zealand Dollar (NZD) tumbling by 1% against the USD. This move by the RBNZ could have broader implications for global central banks, as it suggests that concerns about economic slowdown are prompting more aggressive monetary policy actions.
Equity Markets and Treasury Yields
Equity markets have struggled to interpret the CPI data, with indices trading sideways as investors weigh the implications for future Fed policy. The lack of a clear directional move in equities reflects the broader uncertainty in the market, as participants await more definitive signals from upcoming economic data.
In the bond market, the yield on the 10-year US Treasury note has recovered slightly, trading around 3.86%. This modest recovery in yields has helped to stabilize the USD to some extent, although the overall direction of Treasury yields will likely depend on the next round of economic data and any potential shifts in Fed policy expectations.
Fed Policy Outlook: What’s Next?
The CPI data has done little to clarify the Fed’s path forward, leaving traders to speculate on the size of the next rate cut. The CME FedWatch Tool currently shows a 47.5% chance of a 25 basis point cut in September, with a slightly higher 52.5% probability of a 50 basis point cut. Beyond September, the market is pricing in another 25 basis point cut in November, with a 31.5% probability of rates being 75 basis points lower by the end of the year, and a 17.7% chance of a 100 basis point reduction.
This uncertainty underscores the challenges facing the Fed as it navigates a complex economic landscape. While inflation appears to be under control, concerns about growth and the potential for a deeper slowdown are keeping the Fed’s options open. As a result, the USD is likely to remain sensitive to incoming data, with each new release having the potential to shift market expectations and trigger significant moves in the currency.
A Market in Wait-and-See Mode
The US Dollar’s recent movements reflect a market that is still searching for direction. While the CPI data provided some reassurance that inflation is not accelerating, it did little to resolve the broader uncertainty about the US economic outlook and the Fed’s future policy actions. As traders look ahead to Thursday’s Retail Sales and jobless claims reports, the USD is likely to remain in a state of flux, with potential for increased volatility as the week progresses.
The key levels for the DXY, particularly the 103.18 resistance and the 102.17 support, will be critical in determining the next phase of the USD’s journey. For now, the market remains in wait-and-see mode, with the potential for significant moves depending on how the data and global developments unfold in the coming days.
