Dollar Index, EUR & GBP Outlook: Dollar Softens as ECB Hike Nears and Oil Revives Inflation Risk
The U.S. dollar continues to struggle on Wednesday, with positive domestic employment data countered by a quickly rising yen and uncertainty over what the Fed will do in September. Investors are almost evenly split between a 25 basis point Fed Funds rate increase and holding steady. This means that the Friday release of the U.S. consumer price index will be the key policy indicator. Rising Middle East oil prices are causing more inflation concerns, but policymakers still can’t determine how much and to what extent the shock will affect prices.
The Dollar Index is falling as the yen has appreciated by roughly 4% this month. Investors are selling the carry trades they financed with yen as both market observers and the Bank of Japan are speculating that the BOJ will tighten policy and Japanese yen capital will return home.
The euro is also waiting for the results of the ECB’s policy decision. The market is almost certain of another 25 basis point rate hike. The reflective deposit rate is expected to move to 2.50% along with a 3.3% increase in inflation in the Eurozone. Of perhaps more concern, is what the ECB will do after September if the energy shock remains.
For sterling, the Bank of England is taking a more cautious approach. All 65 economists polled by Reuters expect no change on September 17, and 57 expect no change by the end of the year. There is no evidence of second-round inflation from higher energy costs and costs to domestic firms. With higher costs of borrowing for the government, tighter financial conditions do not warrant immediate action from the BoE.
U.S. Dollar Index Technical Analysis: DXY Tests 98.71 as Bearish Trend Remains Intact
The U.S. Dollar Index is currently at 98.73 on the 1-hour chart. What is notable here is price action respecting the descending trendline as it drops below both moving averages. The continuing downtrend has brought price action back to the 98.71 level. Short-term structure is unchanged and stays in the bearish range, although we are approaching a range where a trading reaction is probable.
A break of the first support at 98.71 will expose 98.57 and then 98.42 further down. Conversely, if price action breaks resistance at 98.90, then it will become more important to watch the levels at 99.05 and especially 99.20.
Indicator RSI (Relative Strength Index) is in a weak range, confirming price action is likely to stay in the bearish range. As long as the 98.71 level holds, a break of 98.90-99.05 will warrant a closing price above 99.20. Without this, we are likely to see price action trade in a range around the support of 98.71.
