US dollar stays flat. Looks to inflation, retail sales

The US dollar index has been trading flat since the Monday after Brexit weekend. Range bound within 96.55 and 95.95 price action has stalled after the strong rally off the lows near 93.32. In our previous outlook on the US dollar, we noted that 95.0 – 94.75 support could make for an ideal opportunity in dollar long positions. While we maintain this view, a breakout above 96.55 could, however, change that perception.

On the economic front, over the past two weeks, data from the US has been broadly positive. Most importantly, the ISM manufacturing and non-manufacturing PMI’s came out better than expected. Not to forget the June jobs report which managed to offset the May’s disappointing print. Focus in the markets has been mostly on the Bank of Japan and the BoE with the dollar seen taking a back seat.

Yesterday, the US producer price index data for June showed an increase for the third consecutive month, stoking expectations that consumer inflation is also likely to push along higher. While the Fed is seen to stay on the sidelines at its FOMC meeting later this month, today’s CPI and retail sales numbers which are moderate in expectations could prove to be the catalyst needed to start building expectations for a rate hike in August. Furthermore, the advance Q2 GDP data will also be released later this month, which should add enough catalyst for the US dollar to seek direction.

US Dollar Index – Technical Outlook

From the technical perspective, the US dollar is likely to stay flat in the near term with the risk of a pullback to near the 95 region being a possibility. The bullish flag pattern signals a continuation to the upside with the measured move looking at a price likely to target 97.50 followed by 98.55, which can be validated on a close above 96.55 which has morphed into a minor resistance level. Failure to break out off this minor resistance could no doubt trigger further downside and would validate the view of a pullback to the 95 region.

Looking ahead the consumer inflation data due for release today is expected to show a 0.20% increase on a month over month basis on the Core CPI while on a year over year basis, consumer inflation is expected to rise 2.20%, same as the month before. The only bullish forecast is that for the headline CPI, which is expected to rise 1.10% on the year in June. Retail sales which surged two months ago have been seen pulling back since then. For June, retail sales are expected rise at the same pace as in May, with the exception of the headline retail sales on a month over month basis which is forecast to rise only 0.10%, compared to 0.50% increase in May.

In terms of real catalyst for the US dollar, markets will have to wait until the FOMC meeting on July 27^th followed by the advance GDP on the 29^th of July. Meanwhile, next week’s ECB meeting could be seen as a near-term risk for the US dollar index.