It’s been a slow start to the week for USD, following the strong rally we’ve seen since the recovery off the post-FOMC lows.
USD has softened over recent days, while the market awaits fresh catalysts. Today could be the day for new moves with both March CPI and the FOMC meeting minutes coming out.
Will Inflation Bottom?
On the inflation front, the US is due a good reading. Since peaking at 2.9% in summer last year, prices have trended steadily and heavily lower. They are currently sitting at just 1.5% as of the last reading.
The pullback in oil prices over the final part of last year accelerated the declines which have also come about as a result of increased productivity in US businesses. This means that, despite better wage growth, businesses have been able to absorb labor costs without needing to pass them on to the consumer.
Oil Prices Rising Strongly
However, with oil prices now rising steadily again, posting a winning month each month so far this year, the March CPI could finally deliver some good news for bulls. The market is forecasting a rise to 1.8% on the headline reading with sight upside risk that we see a 1.9% – 2% reading. Meanwhile, expectations are for core to remain unchanged at 2.1%.
FOMC Minutes in Focus
If we print 1.8% or above, we should see a decent pop in USD. However, the extent to which the greenback rallies will likely be determined by the tone and detail of the March FOMC meeting minutes.
Last month’s FOMC meeting caused a lot of volatility in USD. There was a strong, initial sell-off followed by a sharp recovery rally which eclipsed the losses of the day and took the dollar to multi-week highs. At the meeting, the Fed acknowledged the recent slowdown in growth, both domestic and global, and confirmed its view that keeping rates on hold is the right move for the time being.
In today’s meeting minutes, traders will be keen to assess just how deep this slowdown is and how far the Fed sees it going. While the Fed has acknowledged recent weakness in the market, we will be looking to get a sense of whether this weakness is forecast to be temporary or to worsen throughout the year.
A sense that it is temporary, should keep USD underpinned as traders perceive a return to tightening. Although, if traders get the sense that the Fed is concerned about the path of the economy, this could see rate hike expectations further pushed out, leading to a materially weaker US Dollar.
After trading up to test the 97 level, which was the February closing high, the USD Index has seen sellers stepping, capping upside for now. This could prove to be the right shoulder of an interim head and shoulders pattern, pointing to a move lower. Indeed, though the index remains in the broader bullish channel which has framed price action over the last year, the RSI indicator highlights the lack of momentum in the move and the potential risk of a reversal lower. The next support zone to watch is the 95.72 level, coming in just above the channel low.
On the intraday charts, you can see that price is currently sitting on the 96.57 support, having bounced off the supporting trend line. A break below here will bring the 96.30 level support into focus.