- The U.S. dollar index advanced and settled near its highest level since early March on Friday, rising for the eighth consecutive week
- The greenback’s recent upward momentum has been driven by rising bond yields in an environment of resilient economic activity and sticky inflation
- The August U.S. CPI report will steal the spotlight in the coming week and will likely set the tone for the FX markets in the near term
The upcoming week has a ton of event risk. All eyes will be on the upcoming US inflation report on Wednesday. The Federal Reserve may be in for a mixed bag. The headline rate is projected to increase from 3.2% to 3.6%, possibly as a result of the recent increase in crude oil prices, but core inflation is predicted to fall to 4.3% y/y from 4.7% in July.
— Lina-Gold Analyst (@XAUUSD_Lina) September 11, 2023
The FOMC has raised borrowing costs 11 times since 2022 as part of a strategy to quash rampant inflation, bringing its benchmark rate to a range of 5.25% to 5.50%, the highest in 22 years. Despite the forceful actions by the Fed, the current tightening cycle is likely not yet over, considering the prevailing macroeconomic conditions.
Recent data indicate that, in contrast to past experience during periods of aggressive central bank monetary policy, the economy has reaccelerated this summer rather than weakened. As an illustration, the ISM services sector PMI increased in August from 52.7 to 54.5, exceeding all forecasts and hitting its highest level since February. Given these encouraging trends, the Atlanta Fed’s GDP Nowcast predicts that third-quarter output will increase at an annualized rate of 5.6%.
— What The Finance (@WhatTheFinance9) September 10, 2023
The resilience of the economy, coupled with tight labor markets, will keep household spending healthy for now, putting upward pressure on aggregate demand – a key driver of inflation. This could compel policymakers to deliver additional tightening this year despite their pledge to “proceed carefully” going forward.
Regarding the upcoming FOMC meetings, investors predict that there won’t be any changes to the current policy position in September, but they view the November meeting as “live,” with a 43.6% probability that a quarter-point increase would be approved. This possibility might become more likely in the following days, especially if the impending U.S. inflation report shows increased inflationary pressures.
— DailyForex (@Daily_Forex) September 11, 2023
The U.S. Bureau of Labor Statistics will release August consumer price numbers on Wednesday. Projections suggest headline CPI rose 0.6% m/m last month, pushing the annual rate to 3.6% from 3.2% in July. The core gauge, for its part, is seen climbing 0.2% m/m, with the 12-month reading easing to 4.3% from 4.7% prior.
The U.S. dollar would benefit from an increase in the actual data’s departure from market expectations since it would support more policy firming. The dollar could experience a setback, erasing some of its recent gains and losing strength against its major rivals, if the findings meet or fall short of expectations.
The U.S. dollar broke out on the topside this past week, clearing trendline resistance and its May peak decisively before setting a fresh multi-month high above the 105.00 handle ahead of the weekend.
The inflation could be stickier than anticipated. Even though the US is in QT, the price of OIL increased ~32% in the last 4 months. The consumer is being crushed by high-interest rates and higher costs.#2024recession pic.twitter.com/BkANIR0RB9
— Ethan(Broken Logic Seeker) (@etiensyo) September 11, 2023
With the bulls in clear control of the market, the DXY index might maintain its upward momentum in the coming days, particularly if it manages to remain above technical support at 104.50. In such a scenario, prices may charge towards 105.30, a key ceiling created by the 38.2% Fib retracement of the September 2022/July 2023 slump. On further strength, a retest of the 2023 highs becomes increasingly probable.
However, if sellers take control again and cause a drop, initial support is seen at 104.50, followed by 103.95. The next area of significance in the case of prolonged weakening is located around 103.50, which is below these criteria.