US Dollar ahead of inflation data: DXY

As we wrote in the Week Ahead, the US Dollar (vis a vis the US Dollar Index) has been in a tear since early January.  The reason seems to be that higher inflation expectations have been creeping into the market,  which is causing the US Dollar Index (DXY) to move higher.  This can also be seen in the US 10 yields, which last week put in new year to date highs.  However, DXY has pulled back the last few days as the Democratic controlled US Congress passed measures to help get the $1.9 trillion stimulus package done.  House Speaker Nancy Pelosi said she hopes the legislation will be passed by the end of the month.   In addition, some recent Fed speakers have noted that the Fed will remain accommodative for “a very long time”.  Since the beginning of February, major US stock markets are up roughly 5%, with the small cap Russell 2000 up nearly 10%.  Higher stocks prices help to push the US Dollar lower.

A year ago, annualized inflation was at 2.5%, within the Feds target range of 2%-3%. However, as the pandemic stuck, that number fell to a low of 0.1% in May.  The inflation rate steadily increased through the summer and leveled off in the fall, with a 1.4% reading in December.  Core inflation followed the same path, however only reached a low of 1.2% in May and June, leveling off ta 1.6% in December.  Expectations for January’s prints are 1.5% for both headline and core inflation.

On a 240-minute timeframe, DXY broke out of a descending wedge at the beginning of January near 89.60 and began trending higher in an orderly channel, while forming an inverse head and shoulders pattern.  Price reached the top of target of the descending wedge, which was also the breakout level for the inverse head and shoulders in early February near 91.00.  The DYX reached as high as 91.61 as the RSI moved into overbought territory and reversed lower below the neckline of the inverse head and shoulders, negating the pattern.   DXY has recently broken below the bottom upward sloping trendline of the channel near 91.72 and is trying to retest the bottom side of that trendline.

Source: Tradingview, City Index

Horizontal support below is at 90.36 and at 89.93.  Resistance above is the upward sloping trendline at 90.72 and then not until the horizontal neckline near 91.00.

If the inflation data comes out stronger than expected, the US Dollar may continue higher within the upward sloping channel back towards the top trendline near 92.00.  However, if it is weaker, the DXY make continue lower and the whole January move higher may just be considered corrective within a longer-term downtrend.  Watch the data release on Wednesday, as well as Fed Chairman Powell’s speech Wednesday afternoon to see if he agrees with recent Fed comments regarding monetary stimulus.

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