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US Dollar Outlook Post Inflation Upside Surprise, Setups on EUR/USD & USD/JPY

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US DOLLAR FORECAST:

  • U.S. dollar inches modestly higher after U.S. consumer price index data tops estimates
  • January headline inflation clocks in at 6.4% y-o-y, core CPI at 5.6% y-o-y
  • This article looks at EUR/USD and USD/JPY ‘s key technical levels to monitor in the near term

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The U.S. dollar, as measured by the DXY Index, exhibited volatility after U.S. inflation data crossed the wires, seeking direction as bulls and bears engaged in a hard-fought tug of war. While the greenback took a dive in a knee-jerk reaction, it ultimately managed to erase losses and climbed into positive territory as Treasury yields, especially those at the front end made a run higher (DXY up +0.10% to 103.41 at the time of writing.

WHAT’S BEHIND MARKET MOVES?

The U.S. Bureau of Labor Statistics (BLS) released this morning its latest inflation report. According to the agency, the consumer price index rose 0.5% on a seasonally adjusted basis, bringing the annual rate to 6.4% from 6.5%, two-tenths above consensus estimates. For its part, the core gauge, which excludes food and energy expenditures, clocked in at 0.5% m-o-m and 5.6% in the last 12 months, slightly above forecasts.

US INFLATION DATA AT A GLANCE

Source: DailyFX Calendar

While the upside surprise was disappointing and may embolden market hawks to push for more Fed hikes, it is important to note that not everything was negative in this morning’s report. For instance, shelter, a lagging indicator, accounted for nearly half of the CPI gain, after jumping 0.7% m-o-m. If real-time numbers on housing metrics were included instead, this category would be in disinflation by now, suggesting that current figures may be misleading about price trends.

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FED FUTURES IMPLIED YIELD AND US TREASURY RATES

Chart, histogram  Description automatically generated

Source: TradingView

Taken together, today’s data may be slightly bullish for the U.S. dollar, though probably insufficient to alter the risks around the Fed’s policy outlook or lead traders to reprice significantly higher the FOMC terminal rate on a sustained basis. That said, the U.S. currency may retain some support in the coming days but will need additional catalysts to extend its recovery over a longer-term horizon, especially if sentiment stays buoyant.

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EUR/USD TECHNICAL ANALYSIS

EUR/USD is still in a consolidation phase, stuck between resistance at ~1.0800 and support at ~1.0650. For the pair to take a decisive directional cue, prices need to break out of this range. That said, if the consolidation resolves to the upside, we could see a move towards 1.0935, followed by a retest of the 2023 high. On the other hand, if technical support at 1.0650 is breached on the downside, the selling momentum could accelerate, paving the way for a fall towards 1.0495.

EUR/USD TECHNICAL CHART

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EUR/USD Technical Chart Prepared Using TradingView

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USD/JPY TECHNICAL ANALYSIS

After the recent bounce, USD/JPY is now approaching resistance near 133.10. If bulls manage to drive the exchange rate above this barrier, upside impetus could gather strength, allowing buyers to launch an attack on 134.90, followed by 136.70, the 38.2% retracement of the October 2022-January 2023 decline. Conversely, if sellers return and trigger a bearish pullback, initial support appears at 129.70 and then 128.50, a floor created by a short-term rising trendline in play since February 2022.

USD/JPY TECHNICAL CHART

Chart, histogram  Description automatically generated

USD/JPY Technical Chart Prepared Using TradingView

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