- After last week's upbeat employment data, attention now shifts to upcoming US inflation figures.
The recent surge in the US dollar halted following mixed PMI data, hinting at potential volatility ahead of the CPI release.
This week's CPI data is poised to sway market sentiment surrounding the US dollar, as it will play a key role in the Fed's decision to cut rates this year.
Invest like the big funds for less than $9 a month with our AI-powered ProPicks stock selection tool. Learn more here>>
After last week's employment data, the spotlight shifts to US inflation numbers this week.
Last week, the labor market data boosted the US dollar, halting its decline post-labor data. However, investors grappled with mixed data later on, with PMI indicating a slowdown in service sector growth despite employment gains.
This week, the US CPI data is set to spark a directional move in the US dollar.
US Dollar Index: Technical View
The dollar, which began to decline from the 105 level, stabilized after finding support at 104. The direction of the dollar in the short term hinges on inflation data due this week.
If inflation surpasses expectations, mirroring the trend of the previous two months, it may reinforce the market perception of a more hawkish Fed policy.
This could lead to fewer anticipated rate cuts this year. If the first half of the year follows the trajectory of the first quarter, there might even be speculation of the Fed refraining from interest rate cuts this year.
Fed members have recently expressed caution regarding rate cuts, prioritizing inflation over employment.
The upcoming announcement of March inflation figures, scheduled for Wednesday, will likely serve as a crucial test for the dollar. If inflation surpasses expectations, it could give the Fed an excuse to postpone rate cuts.
While the US economy maintains its strength, other developed nations grapple with more challenging economic conditions.
This dynamic increases the likelihood that the US Federal Reserve will lag in the interest rate cut cycle, which has already commenced with actions by the Swiss National Bank and is anticipated to continue with the European Central Bank.
Such a stance suggests that dollar yields may remain elevated for a longer duration, leading to a potential appreciation of the dollar against major currencies.
Currently, the DXY has commenced the week on a positive note above the 104.2 level, where it found support last week. The dollar turned upwards in the initial week of March, confirming a limited correction.
Presently, the dollar could move within an upward channel, as the daily chart shows support at the lower band of the channel during last week's pullback.
If March inflation remains resilient, it could prompt the index to retest the 105 level initially, supporting the dollar, and potentially advancing towards the 106 level, depending on movements within the channel.
Alternatively, a support level at 104 is key, with the likelihood of accelerated dollar sales increasing if there is a downward break below 103.75.
EUR/USD: Technical View
The European Central Bank (ECB) meeting is the second most crucial event of this week.
The ECB will leave interest rates unchanged this month. However, we'll be looking for hints in the meeting notes about a possible rate cut in June. This will make the meeting even more significant and affect the EUR/USD.
The ECB faces a different situation compared to the Fed. While the Fed can closely follow its 2% inflation target, the US economy's health allows it to freely adjust rates.
Conversely, the ECB is confident about reaching its 2% inflation goal but lacks clarity on its easing measures to support the economy.
Looking at the EUR/USD pair, it has remained steady over the past three trading days, with the dollar exerting pressure around the 1.083 level.
Currently, EUR/USD stability is uncertain, with 1.082 serving as the closest support. Daily closures above 1.085 would indicate potential upward momentum for the pair.
EUR/USD will be influenced by US inflation data this week, potentially increasing volatility.
High inflation favoring the dollar could push the pair below 1.08 initially. Conversely, if CPI shows a decrease compared to the last two months, positive factors for the euro may lead to a swift move towards the 1.09 level.
***
Take your investing game to the next level in 2024 with ProPicks
Institutions and billionaire investors worldwide are already well ahead of the game when it comes to AI-powered investing, extensively using, customizing, and developing it to bulk up their returns and minimize losses.
Now, InvestingPro users can do just the same from the comfort of their own homes with our new flagship AI-powered stock-picking tool: ProPicks.
With our six strategies, including the flagship "Tech Titans," which outperformed the market by a lofty 1,745% over the last decade, investors have the best selection of stocks in the market at the tip of their fingers every month.
Subscribe here and never miss a bull market again!
Disclaimer: This article is written for informational purposes only; it does not constitute a solicitation, offer, advice, or recommendation to invest as such it is not intended to incentivize the purchase of assets in any way. I would like to remind you that any type of asset, is evaluated from multiple points of view and is highly risky and therefore, any investment decision and the associated risk remains with the investor.