- Ahead of tomorrow's inflation data, the US dollar is trading sideways and hovering around three-month highs.
- The dollar is currently approaching a key resistance level and could rise if the CPI data surprises.
- In this article, we will look at the key levels that those looking to trade the US Dollar should pay attention to as data is released.
- In 2024, invest like the big funds from the comfort of your home with our AI-powered ProPicks stock picking tool. Learn more here>>
Markets are eagerly awaiting the first rate cut from the Federal Reserve and all eyes will be on tomorrow's data.
Before the release, it started the week trading sideways. Last week, it rose to 104.6, a level not seen since November, before falling back to the 104 mark.
Despite this setback, the dollar managed to maintain its position near three-month highs, staying within the range of the critical resistance point.
However, last week's rise in yields was a factor that partially supported the dollar.
Morgan Stanley Research analysts, for their part, once again mentioned the high correlation in their note on the relationship between the dollar and government bonds. They said that long-term bond auctions, especially bond auctions, tend to have an impact on the dollar.
The fact that the dollar currently offers higher real rates than major currencies and even some emerging markets continues to stand out as another factor that maintains its attractiveness.
On the other hand, although the Federal Reserve's extremely cautious stance on interest rate cuts supports the idea that interest rates can remain high for much longer, the US dollar's slow momentum is worth noting.
The cautious increase in demand for the dollar could be repositioned with new positions to be taken with inflation data.
Consequently, if inflation data is lower than expectations, this will strengthen the markets narrative that the Federal Reserve could cut interest rates sooner and in this case, we could see a weakening of the dollar.
Otherwise, demand for the dollar is more likely to rise rapidly and break its critical resistance.
Jerome Powell and other Fed members have recently downplayed the possibility of an early rate cut, emphasizing the need for additional data to ensure inflation stays close to the central bank's target range.
The release of the data is of particular importance as it can directly influence the short-term outlook for the dollar. The moderate decline in inflation is a key factor that could cause a fall in the dollar.
Furthermore, any sign of a weakening labor market is crucial. Strong jobs data earlier in the month had all but ruled out an interest rate cut in March, contributing to the dollar's bullish momentum.
Markets are currently pricing in a rate cut in May, and tomorrow's data release will play a key role in this pricing.
The dollar index chart reveals gradual increases since the beginning of the year.
Finally, a bounce was seen with the , which was almost double expectations, and the DXY weakly tested the 104.6 level (0.618 fib).
This level could serve as a major resistance point based on the recent bearish momentum.
Since then, DXY has partially declined and continues to use the 0.5 Fib and the 8-day EMA at 104 as support.
This week, a support line may form for the DXY up to 103.8, while the CPI within expectations may cause a drop to 103.5.
This level is firm support for the short-term EMAs and the end result of the ascending channel.
If the idea that January CPI alone is not convincing for the Fed's decision and that jobs data must also be seen, the DXY could manage to hold at 103.5 levels in a possible pullback.
On the other hand, it is very possible to see a jump in the DXY after higher than expected inflation.
This may help the Dollar Index decisively break the resistance at 104.6 and move quickly towards 0.786 Fib and the upper band of the channel at 105.7.
Key EUR/USD Levels to Watch
Last week it slowed down its depreciation against the US dollar, which has continued since the beginning of the year.
EUR/USD, which fell as low as 1.072 last week, closed the week at 1.078, appearing to stabilize.
The rhetoric that the ECB could start cutting interest rates before the Federal Reserve is gaining weight, and there are some statements from the ECB wing that support this interpretation.
This continues to keep the euro under pressure against the dollar, while supporting dollar strength. In the middle of last week, the eurozone's fourth quarter economic growth data may increase volatility in the pair.
However, we can mention that the US inflation data to be announced in advance may remain more dominant in the direction of EUR/USD.
If we look at the daily EUR/USD chart, it highlights the movement of bearish momentum in the latest move towards the ideal correction rate Fib 0.618.
Although quick reaction purchases come from this area, the average level of 1.08 remains valid as critical resistance.
If EUR/USD fails to reclaim the 1.08 level this week, we may see a stronger move towards 1.07 with selling pressure.
While the negative outlook for the Euro remains valid at the moment, below 1.07, it may be possible to see a drop to the 1.06 limit after weak support in the 1.066 region.
On the other hand, if a floor is formed above 1.08, weekly closes above 1.088 can be expected for a possible euro recovery.
Take your investing game to the next level in 2024 with ProPicks
Institutions and billionaire investors around the world are already far ahead when it comes to AI-powered investing, using, customizing and developing it extensively to increase their returns and minimize losses.
Now, InvestingPro users can do the same from the comfort of their 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 whopping 1,183% over the last decade, investors have the best selection of stocks on the market at their fingertips each month.
Subscribe here and never miss a bull market again!
Don't forget your free gift! Use coupon code OAPRO1 at checkout to get a 10% discount on the annual Pro plan, and OAPRO2 to get an additional 10% discount on the annual plan.
Disclaimer: This article is written for informational purposes only; It does not constitute a solicitation, offer, advice or recommendation to invest as such and is not intended to encourage 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 in the hands of the investor.