DOLLAR INDEX FUNDAMENTAL FACTORS

The US dollar had a rollercoaster of a week with beginning with mixed US CPI figures followed by PPI and retail sales that reinforced the robust state of the US economy and hinted at potential inflationary pressures to come. Although the ‘higher for longer’ message remains and potentially looks to be more persistent, the outlook for next weeks Fed rate announcement is likely to result in a rate pause.

Money market pricing as shown below reflects the possibility for one more rate hike if needed (as suggested by Fed speakers) but the sustained elevated interest rate environment could maintain greenback strength. Interestingly, rate cuts for December 2024 was revised lower by roughly 7bps on Friday to 81bps in response to recent US economic data despite a drop off in the latest Michigan consumer sentiment report. In addition, a weakening euro could supplement dollar upside with the euro comprising 57.6% of the Dollar Index (DXY).

IMPLED FED FUNDS FUTURES

Source: Refinitiv

The announcement next week (see economic calendar below) will be more about what comes next in terms of guidance around hiking in November or December this year. I expect more of the same from Fed Chair Jerome Powell in that the messaging will reiterate the importance of data dependency while keeping the door open for future rate hikes if required. Building permit data will precede the Fed’s announcement but should not have a major material impact on decision making.

US ECONOMIC CALENDAR (GMT +02:00)

Source: DailyFX economic calendar

TECHNICAL ANALYSIS

U.S. DOLLAR INDEX (DXY) DAILY CHART

Chart prepared by Warren Venketas, IG

Price action on the daily DXY chart above could paint a picture of two tales, the first being bearish/negative divergence where prices exhibit higher highs while the Relative Strength Index (RSI) prints lower highs often leading to subsequent downside to come (a possibility if markets perceive the Fed’s guidance as dovish).

From a bullish perspective, although not quite developed is the chance for a golden cross formation should the 50-day moving average (yellow) cross above the 200-day moving average (blue). The likelihood of another push higher is less than that of a pullback towards subsequent support zones.

Resistance levels:

• 106.00

Support levels:

• 105.00
• 104.45