US dollar index: DXY bull trend over as inflation cools?
DXY fundamental analysis
The dollar tumbled after US consumer inflation data fell more than expected in October.
Annual headline inflation
USIRYY
fell to 7.7% in October, from 8.2% the previous month and below the 8% predicted. The core measure of inflation
USCIR
, which excludes volatile energy and food costs, fell to 6.3% from 6.6%, falling short of expectations (6.5%). The monthly increase in headline inflation was 0.4% instead of the 0.6% that was expected, and the core increase in inflation was 0.3% instead of the 0.5% that was expected.
Lower-than-expected US inflation has prompted investors speculating on slower Fed rate hikes in the future.
The probabilities for the December meeting have swung in favour of a 50 basis point hike, which is currently factored with an 80% chance, up from 50% before the CPI release.
The expected terminal rate at which the Fed's rising cycle will terminate in May 2023 has decreased to 4.80% from 5.08% before to the inflation report. This means that the markets are currently pricing in an increase of just over 75 basis points until May 2023. US 2-year Treasury yields, which reflects expectations for the Fed monetary policy sunk by 26bps to 4.3%. Expectations of Fed terminal increases and rising US 2-year Treasury yields have supported the DXY bull trend throughout the year.
Reduced rate hike expectations are bad news for the dollar, but Fed Chair Jerome Powell's comments at October's FOMC meeting suggest it's premature to declare the end of the raising cycle.
Technical analysis
The DXY daily chart would suggest that we may be facing the end of the dollar's bullish trend, as the price action in the November 10th session actually broke down the bullish trendline of 2022, and lowered even further than the 50-day moving average.
However, for a confirmation of that trend reversal in the DXY, we should likely wait until major Fibonacci retracement levels are cleared by price action.
The next level of support is 107.1 (38.2% Fibonacci level of 2022 range), followed by 104.7, which would represent a 50% retracement of the 2022 dollar rally.
If bears can break through that barrier, it would mean that they will be in charge of the dollar trend.
However, if the Fed pushes back against the slowdown in the inflation rate and signals a more restrictive monetary policy than the market is actually pricing in, we might see some bulls reappear on DXY dip. This contrarian scenario, which seems less likely for the market, could effectively limit the downward movement of the USD.
The dollar tumbled after US consumer inflation data fell more than expected in October.
Annual headline inflation
USIRYY
fell to 7.7% in October, from 8.2% the previous month and below the 8% predicted. The core measure of inflation
USCIR
, which excludes volatile energy and food costs, fell to 6.3% from 6.6%, falling short of expectations (6.5%). The monthly increase in headline inflation was 0.4% instead of the 0.6% that was expected, and the core increase in inflation was 0.3% instead of the 0.5% that was expected.
Lower-than-expected US inflation has prompted investors speculating on slower Fed rate hikes in the future.
The probabilities for the December meeting have swung in favour of a 50 basis point hike, which is currently factored with an 80% chance, up from 50% before the CPI release.
The expected terminal rate at which the Fed's rising cycle will terminate in May 2023 has decreased to 4.80% from 5.08% before to the inflation report. This means that the markets are currently pricing in an increase of just over 75 basis points until May 2023. US 2-year Treasury yields, which reflects expectations for the Fed monetary policy sunk by 26bps to 4.3%. Expectations of Fed terminal increases and rising US 2-year Treasury yields have supported the DXY bull trend throughout the year.
Reduced rate hike expectations are bad news for the dollar, but Fed Chair Jerome Powell's comments at October's FOMC meeting suggest it's premature to declare the end of the raising cycle.
Technical analysis
The DXY daily chart would suggest that we may be facing the end of the dollar's bullish trend, as the price action in the November 10th session actually broke down the bullish trendline of 2022, and lowered even further than the 50-day moving average.
However, for a confirmation of that trend reversal in the DXY, we should likely wait until major Fibonacci retracement levels are cleared by price action.
The next level of support is 107.1 (38.2% Fibonacci level of 2022 range), followed by 104.7, which would represent a 50% retracement of the 2022 dollar rally.
If bears can break through that barrier, it would mean that they will be in charge of the dollar trend.
However, if the Fed pushes back against the slowdown in the inflation rate and signals a more restrictive monetary policy than the market is actually pricing in, we might see some bulls reappear on DXY dip. This contrarian scenario, which seems less likely for the market, could effectively limit the downward movement of the USD.