– Last week we questioned whether the mighty dollar would continue dominating the FX space after its shaky performance since the start of Q4.

Our question was partially answered last Thursday after official reports showed annual inflation in the United States slowed to 7.7% in October. Not only was this the lowest level seen since January 2022 but well below the 8.2% figure seen in September. Given how this development significantly reduced the pressure on the Fed to keep raising interest rates aggressively, the dollar collapsed like a house of cards.

With the dollar falling for a fourth straight week in its worst performance since 2020, it is safe to say that bears are in the building and ready to rumble.

Even the equally-weighted USD index collapsed, dipping below the 1.2000 support level for the first time since mid-September.

Given how the fundamentals are swinging in favour of USD bears and the technicals are singing a similar note, dollar weakness could become a key theme for the rest of 2022. Such a development may even set the stage for renewed USD weakness in 2023 as easing inflationary pressures bring Fed doves back into the scene.

This could be another big week for the greenback thanks to numerous speeches from Fed officials, key US economic data, and a big announcement from Former US President Donald Trump on Tuesday. In the meantime, the trend remains a trader’s friend with the path of least resistance on the USD pointing south.

The low down…

One only needs to look at the DXY daily chart to see that bears are back in town.

The dollar’s extreme reaction to last Thursday’s inflation data confirms how sensitive the currency remains to anything concerning inflation and rate hike expectations. Over the past few months, the fundamental forces supporting the almighty dollar have been diminishing slowly. Initially, the greenback drew ample strength from the risk-off mood, confidence in the US economy, and bets for aggressive interest rate hikes by the Fed. Over time, these themes have changed – slowly stripping the dollar of its regal strength and dominance in the FX space.

With roughly six weeks until the New Year, the dollar’s fortunes seem to be changing rapidly as bears enter the scene. If US economic data and Fed officials fuel speculation around slower rate hikes, the dollar could find itself on a slippery decline over the next few weeks.

The week ahead…

Price action could be the primary force influencing the dollar as investors closely scrutinize speeches from Fed officials and US economic data.

There could be a burst of dollar volatility on Tuesday thanks to Donald Trump’s big announcement, where he is expected to announce a second bid for re-election. Mid-week, Fed’s John Williams, and Lael Brainard will be under the spotlight. On Thursday, Fed’s Neel Kashkari and Loretta Mester speak with the US Conference Board leading index and existing home sales published on Friday. It will be interesting to see whether the pending economic reports and Fed speeches fuel or limit the dollar’s downside momentum.

Dollar bears march into the scene

The equally weighted dollar index remains under intense pressure on the daily charts. After cutting through the 1.2400 level like a hot knife through butter, prices dipped below 1.2000 for the first time since September. Bears are clearly in a position of power and may drag the index lower over the next few days to weeks. The current downside momentum may drag prices toward the 1.2900 support level. Below this point prices could test 1.2800 and 1.2700, respectively.  If prices can break above 1.2184, a rebound back towards 1.2400 could be on the cards.