Meanwhile the Dollar Index (DXY) has begun to claw back from lows made yesterday. Traders are awaiting Wednesday’s release of the next U.S. Consumer Price Index (CPI) numbers. This release was highly anticipated and will provide important news on the direction of inflation. Its importance has increased after the recently released news of an unexpected jump in the unemployment rate. Most analysts agree that the Dollar Index will have a three wave bullish recovery. Each wave shapes the future direction of that wave.
The Dollar Index measures the currency’s strength against a basket of other currencies. Currently, it’s attempting a hard push to recover back up to the 98.73 region, the first major resistance marker. If this recovery continues, chart-watchers will be looking very closely at the 99 to 99.30 level. The next CPI data will be critical in influencing how much of this rebound sticks. Analysts are predicting inflation to come in at 3.1%, one-tenth above the last 3.0%.
A stronger than expected inflation report could turn the Dollar Index’s outlook on a dime. This amendment would reduce the likelihood of further interest rate reductions. A lovelier inflation print closer to 3.0% would definitely give more of a cushion case for dovish moves. This, in turn, would increase the likelihood of putting downward pressure on the index. The unemployment spike adds another increasingly difficult backdrop to our economy. What matters now is the market’s reaction to the CPI release, which will largely shape expectations for monetary policy going forward.
The dollar indexed recovery so far speaks more to the market’s perception and expectations of incoming economic data. Traders are understandably especially attuned to the effects inflation can have on interest rates. A whopper of an inflation print might have the Fed backtracking on their pivot. On the other hand, a downside surprise on inflation might spark a renewed focus on more accommodative policies.
The release of CPI inflation is always highly awaited by the market. How inflation data interacts with employment statistics is going to be a big key in the Dollar Index’s destiny. Those are the biggest pieces, due out soon, that will impact the index the most. These are the last big economic headlines they’ll frame in the weeks ahead as well.