USD, DAX outlook: Two trades to watch

USD outlook: All eyes on US CPI

• US CPI expected to remain at 5%
• No progress in debt ceiling talks
• USD trades range bound 100.80 – 101.50

The USD is holding steady after two days of gains. The greenback was supported yesterday by comments from New York Federal Reserve President John Williams said that interest rates could rise if inflation doesn’t come down.

His comments come ahead of US inflation data which is expected to hold steady at 5% YoY in April, which trails the Cleveland Fed forecast by 0.2%. Although the Cleveland gauge has overestimated the actual print 5 out of the last 6 times. Meanwhile, core inflation is expected to cool to 5.5% from 5.6%.

The data comes as the Fed hinted in the May meeting that it could pause rate hikes next month. Today’s data could be a key deciding factor in that decision.

Separately US debt ceiling jitters remain after a meeting between Joe Biden and key congressional leaders saw no progress in negotiations, meaning that the US is still on track to run out of money in early June. Moody’s is assigning a 10% probability to a breach.

USD outlook: technical analysis?

The USD index has been trading range bound across the past month, supported on the lower side by 100.82 and on the upper side by 101.50.

The RSI is just marginally below the 50 level, the neutral level, providing few clues. Traders could look for a breakout trade.

Sellers could look for a break below 101.02, last week’s low, and 100.80, for an extended selloff.

Meanwhile, buyers could look for a rise over 101.41 the weekly high, ahead of 101.50 for a break out to the upside. A break above here exposes the 50 sma at 102.60 and brings the 103.50 resistance into play.

DAX struggles below 16000 after German inflation data

• German CPI cooled to 7.2% YoY in April
• ECB lending report last week pointed to weaker credit demand
• Bearish RSI divergence suggests DAX could struggle to break meaningfully above 16000

The DAX is little changed at the start of the day as investors digest German CPI data, which confirmed that inflation cooled to 7.2% YoY, down from 7.4%. This remains elevated by historical standards and comes after the ECB hiked rates by 25 basis points last week.

Yesterday ECB chief economist Philip Lane warned that price growth momentum remains high for now.

Credit conditions remain tight in Europe. The ECB’s lending survey, perhaps more worryingly, showed that demand for credit also fell significantly. Weak demand for loans is often associated to slowing economic activity.

The economic calendar is quiet in Europe. Attention will be on US CPI data for the next catalyst. Traders have been nervous heading towards the data, with investors choosing to sit on the side-lines.

Hotter-than-forecast inflation could fuel bets of another Fed rate hike in June and a hard landing for the US economy.

DAX outlook - technical analysis?

The DAX rose to a 2023 high at 16008 at the start of the week. However, the RSI bearish divergence suggests that momentum is running out of steam, which is not conducive to a higher high.

Support can be seen at 15660, the May low and the rising trendline support. A break below here exposes the 50 sma 15550.

Buyers would be looking for a rise above 16008, to attack 16285, the January 2022 high.