US dollar woes continue to weigh amid weak inflation data

The second trading week of the new year began with some optimism that the US dollar might be able to stage a comeback after starting the year on a weak note. But circumstances have conspired in the latter half of this week to bring the dollar back down near year-to-date lows, extending the greenback’s pronounced weakness that prevailed throughout much of 2017.

While the Federal Reserve may ultimately follow-through on its outlook for three (or possibly four) interest rate hikes in 2018, which should provide some support for the dollar, concerns over lagging inflation continue to plague the prospects for higher interest rates. The latest US inflation readings were released on Thursday in the form of the Producer Price Index. The index showed a relatively rare drop in producer prices of -0.1% for both the headline PPI and Core PPI (excluding food and energy) in December, against a prior consensus forecast of +0.2%. Markets saw this inflation weakness as yet another red flag casting some doubt on the Fed’s trajectory of monetary policy tightening, and the US dollar fell sharply after the release.

The next inflation indicator will be released on Friday in the form of the widely-followed Consumer Price Index. The headline CPI for December is expected at +0.1% after the previous month’s +0.4% reading, while the Core CPI (excluding food and energy) is expected at +0.2% after the previous month’s +0.1% reading. Also to be released on Friday will be December’s US Retail Sales (+0.5% expected) and Core Retail Sales (+0.4% expected). If the CPI data displays additional weakness in consumer inflation, the US dollar is poised to take a further hit.

From a technical perspective on the US dollar index, which is the benchmark index comparing the US dollar against a basket of six major currency rivals, the year-long trend from the beginning of 2017 is clearly bearish. The most recent drop at the end of 2017 prompted a major breakdown below key prior support at 92.50. The beginning of the new year saw an extension of dollar weakness below that level before rebounding back up to 92.50, this time as resistance. As mentioned previously, the past two days have seen the dollar drop from around this resistance area. The drop was driven partly by initial rumors that China was considering halting its purchases of US debt; speculation that the US might pull out of the North American Free Trade Agreement; and weak inflation and jobless claims data out of the US on Thursday. With any further fall in the dollar on Friday due to any continued data weakness in CPI and/or retail sales, a breakdown below the year-to-date low at 91.75 should open a path towards major support at the 91.00 level, which represents September’s multi-year low.

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