Dollar Rally Stalls As Inflation Outlook Questioned
US Core PCE Stalls
The rally in the US Dollar has stalled for now on the back of yesterday’s closely watched inflation data. The monthly core PCE reading was seen printing 0.3%, as expected, with the prior month revised higher to 0.3% from 0.2%. As such, the unchanged reading wasn’t enough to drive a fresh wave of USD buying on the back of the rally we’d seen across the first part of the week. With market pricing for a Fed rate hike by year end having shifted aggressively higher on the back of the June FOMC last week, the barrier for further upside has clearly been raised. Indeed, looking at price action in DXY in response to yesterday’s data, it seems that bulls need to be wary of USD downside risks given how built-up rate-hike expectations have become, so quickly. Any data disappointments or dovish Fed commentary leave USD bulls vulnerable to a squeeze near-term while traders await fresh, concrete signs that tightening is coming.
Oil Prices Falling Sharply
The ongoing move lower in oil prices is also very likely a factor in why USD has stalled here for now. Much of the hawkish Fed view is premised on the idea that US inflation will continue higher through the year given the surge we’ve seen in recent months. However, this surge was mostly attributable to higher oil prices as a result of the Iran war. With oil prices having fallen more than 20% this month, however, now down around 40% from YTD highs, traders are starting to question that inflation outlook and its implications for the Fed.
Technical Views
DXY
The rally has stalled for now into the first test of the 101.91 level resistance. Momentum studies remain bullish here, keeping the focus on further upside while we hold above the 100.18 mark, with 103.20 and the bull channel highs the next target for bulls.
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With 10 years of experience as a private trader and professional market analyst under his belt, James has carved out an impressive industry reputation. Able to both dissect and explain the key fundamental developments in the market, he communicates their importance and relevance in a succinct and straight forward manner.