If last Friday’s dismal US jobs report failed to derail dollar bulls…then what could?
King dollar kicked off the new week on a firm note, appreciating against most G10 currencies as investors remained hopeful over the Federal Reserve tapering in November.
Rising Treasury yields lifted the greenback across the board with the Dollar Index (DXY) eyeing fresh 2021 highs and the dollar rising to its highest level in nearly three years against the yen.
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The 10-year benchmark Treasury yield jumped to its highest level since June amid bets that rising inflation will force the Federal Reserve to tighten sooner than expected. Given how higher Treasury yields make the dollar more attractive to investors, this could translate to more gains in the short to medium term.
Is Inflation the dollar’s frenemy?
With investors on edge over whether rising energy prices could result in higher inflation, all eyes will be on the US Consumer Price Index (CPI) data for September.
Markets are expecting a month-on-month print of 0.3% while the year-on-year figure is forecast to be 5.3% – which is well above the Federal Reserve’s 2% goal. King dollar could receive a jolt of inspiration if the pending U.S consumer price data shows a rise in inflation and bolsters expectations over an earlier than expected rate hike next year. According to the Fed fund futures, as of writing there is a 95.5% probability that the Federal Reserve will hike interest rates in November 2022, with the Fed rate hike fully priced in by the end of next year.
On the flip side, rising inflationary pressures could erode the dollar’s purchasing power – leading to increases in the prices of goods and services over time. Meaning, the value of money one has today is worth less tomorrow.
Key US economic data and Fed minutes in focus
It’s not only the heavily anticipated inflation report that could move the dollar.
Key data ranging from the US weekly initial jobless claims, retail sales for September, and the latest consumer sentiment figures could provide insight into the health of the US economy. The Fed’s argument to for tapering could strength if these reports exceed market expectations.
In regards to the minutes from September’s policy meeting, they are expected to offer insight on the decision to signal tapering. If the minutes strike a hawkish tone and reinforce expectations over the Fed making a move in November, this is likely to boost the dollar.
Dollar Index lingers below 2021 high
Dollar bulls remain on a mission to conquer the 2021 high at 94.52.
A solid daily close above this point could open the doors towards 95.00. Should 94.52 prove to be reliable resistance, a decline towards 93.72 could be expected, followed by a deeper decline towards 93.19.
Zooming into the H4 timeframe, the DXY remains in a bullish channel with a breakout opportunity in the making. Lagging indicators in the form of the MACD and Simple Moving Averages signal further upside. A strong move above 94.52 could signal an incline towards 94.79 and 95.00. Alternatively, a decline back below 94.00 could open a path towards 93.70.
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