Will US inflation be the next ‘hot beat’ on the dance floor?

The hottest beats on the dancefloor these days are inflation reports, with the vast majority of them beating expectations. So it makes me a little nervous that US inflation is expected to soften slightly – as markets have positioned themselves for it to do so. But that also presents opportunities for traders should it all turn to custard.

 

We can take today’s inflation print as a proxy for Fed policy. Another hot report decreases the odds of a slower pace of Fed tightening, likely boosting the dollar whilst weighing on Wall Street, commodities and all other currencies. Whilst a softer inflation report keeps hopes alive that the big hikes are behind us and send the dollar lower.

 

And as we’re approaching a key US inflation report with a weaker dollar, on expectations of softer inflation and a Republican ‘red wave’ that isn’t – I suspect the path of least resistance is higher for USD. And that could easily send DXY back to 112. And with that comes weaker commodity currencies, euro, GBP and a higher USD/JPY.

 

US dollar index daily chart (DXY):

The US dollar index has held above a key support zone around 109.96, which comprises of the October 2002 high, October 2022 low and bullish trendline. A -bar bullish reversal has also formed to suggest a swing low is in place, and with it comes the potential to head back to the monthly pivot point just beneath 112. At this stage I am equally open for it to top out, roll over and break trend support as I am for it breaking back above 112. But for now, the near-term bias remains bullish whilst prices hold above this week’s low.

 

AUD/USD daily chart:

The Aussie has more than handed back this week’s earlier gains, having found resistance around 65c. And that could mark the weekly high with a hotter-than-like US inflation report and send it back towards 63c. And likely quicker, should the Dems retain the Senate.

 

The euro has effectively move in lockstep with the Aussie, having pulled back from resistance just below 1.1000, with parity now coming to the rescue. I expect prices will chop around that milestone level without a new catalyst, with a hot CPI print likely to crash the euro through parity, or it becomes a springboard for prices if inflation actually manages to soften.

 

USD/JPY daily chart:

USD/JPY is holding nicely above the 145.1 and looks ripe for a bounce, given its -4.5% retracement from its intervention high. That said, prices are currently pulling back from the 146.50 area – which markets last week’s area of heaviest trading volume - but that could allow some savvy bulls to enter at a more favourable price, in anticipation for its next leg higher. It may not take much of an inflation ‘beat’ to lift USD/JPY back to 148.