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US Dollar Index Breaks Out From Bearish Flag

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The US dollar index is likely to extend its declines following the breakout from the bearish flag pattern that saw prices consolidate near 95 support through 96.50 resistance. Forming an inside bar yesterday, prices are likely to extend the declines towards the immediate support seen at 95.0 – 94.75 which could offer a short-term bounce in prices. A breakdown below this support could see the US dollar index extend declines all the way down to 94.36 followed by 93.50 region.

US Dollar index – Bearish flag breakout
US Dollar Index – Bearish flag breakout

Inflation and housing data on tap today

Investors will focus on today’s US economic reports which include the inflation report for July. Median forecasts point to a soft print with the headline inflation expected to remain unchanged in July after rising 0.20% in June on a month over month basis. The Core CPI is expected to rise 0.20%, the same pace as in June. US building permits and housing starts are also released simultaneously, and forecasts point to a 0.50% and 0.60% month over month increase in the stats. The housing data is overall forecast to show a moderation following a 1.50% and 4.80% increase in June.

With the markets already unconvinced about a rate hike from the Federal Reserve in September, a weaker set of economic reports is likely to further strengthen the dovish bias. Atlanta Fed President Dennis Lockhart is expected to speak later today, but it is unlikely that his speech will move the markets much, considering that Lockhart is not a voting member. The CME Futures Fed funds rate shows a 9% implied probability of a 25bps rate hike in September. Still, with the recent string of weak economic reports which included a soft producer price index data and flat retail sales numbers, it is unlikely to see the dollar index turn stronger based on today’s reports alone.

CME Futures - Fed Funds Probability: 9.0%, August 15, 2016
CME Futures – Fed Funds Probability: 9.0%, August 15, 2016

On Wednesday, the FOMC meeting minutes will be released which could bring further noise to the markets. However, the main event over the next two weeks will be the speech from Fed President Janet Yellen who is scheduled to speak at the Jackson Hole symposium. Markets will be waiting for clues from the Fed President for any hints on policy decisions at the September meeting. At the July FOMC meeting, the Fed gave subtle hints that the September meeting was a ‘live’ event for a Fed rate hike. But considering the weak economic reports and with only the July jobs report coming out in favor of the Fed, the prospects for the rate hike remain questionable at best.

EURUSD could test 1.130

Following a few weeks of flat trading, EURUSD is seen rising on renewed momentum since late Monday. With price trading within 1.124 – 1.120 resistance level, EURUSD could be seen extending gains to 1.130 to the upside with the potential to rally towards 1.140. The likely catalyst will come from today’s US economic reports and Wednesday’s FOMC meeting minutes. However, the momentum is likely to ease with EURUSD likely to establish a new range within 1.130 and 1.120 with Janet Yellen’s speech in late August likely to be the next main catalyst for EURUSD.

EURUSD could move within 1.130 – 1.120 range
EURUSD could move within 1.130 – 1.120 range
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