US Dollar ahead of inflation data: DXY
Joe Perry February 9, 2021 9:37 AM
If the inflation data comes out stronger than expected, the US Dollar may continue higher
As we wrote in the Week Ahead, the US Dollar (vis a vis the US Dollar Index) has been in a tear since early January. The reason seems to be that higher inflation expectations have been creeping into the market, which is causing the US Dollar Index (DXY) to move higher. This can also be seen in the US 10 yields, which last week put in new year to date highs. However, DXY has pulled back the last few days as the Democratic controlled US Congress passed measures to help get the $1.9 trillion stimulus package done. House Speaker Nancy Pelosi said she hopes the legislation will be passed by the end of the month. In addition, some recent Fed speakers have noted that the Fed will remain accommodative for “a very long time”. Since the beginning of February, major US stock markets are up roughly 5%, with the small cap Russell 2000 up nearly 10%. Higher stocks prices help to push the US Dollar lower.
A year ago, annualized inflation was at 2.5%, within the Feds target range of 2%-3%. However, as the pandemic stuck, that number fell to a low of 0.1% in May. The inflation rate steadily increased through the summer and leveled off in the fall, with a 1.4% reading in December. Core inflation followed the same path, however only reached a low of 1.2% in May and June, leveling off ta 1.6% in December. Expectations for January’s prints are 1.5% for both headline and core inflation.
On a 240-minute timeframe, DXY broke out of a descending wedge at the beginning of January near 89.60 and began trending higher in an orderly channel, while forming an inverse head and shoulders pattern. Price reached the top of target of the descending wedge, which was also the breakout level for the inverse head and shoulders in early February near 91.00. The DYX reached as high as 91.61 as the RSI moved into overbought territory and reversed lower below the neckline of the inverse head and shoulders, negating the pattern. DXY has recently broken below the bottom upward sloping trendline of the channel near 91.72 and is trying to retest the bottom side of that trendline.
Source: Tradingview, FOREX.com
Horizontal support below is at 90.36 and at 89.93. Resistance above is the upward sloping trendline at 90.72 and then not until the horizontal neckline near 91.00.
If the inflation data comes out stronger than expected, the US Dollar may continue higher within the upward sloping channel back towards the top trendline near 92.00. However, if it is weaker, the DXY make continue lower and the whole January move higher may just be considered corrective within a longer-term downtrend. Watch the data release on Wednesday, as well as Fed Chairman Powell’s speech Wednesday afternoon to see if he agrees with recent Fed comments regarding monetary stimulus.
Learn more about forex trading opportunities.
Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to Forex.com or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.