About us 
- Annual Core PCE inflation is forecast to rise to 5.5% in February.
- A strong inflation print could revive expectations of a 50 bps rate hike in May.
- Technical outlook points to a bearish tilt in the US Dollar Index.
The dollar has failed to build on the previous week’s gains and instead has lost nearly 1% in the first half of the week. In the absence of high-tier data releases, the positive shift witnessed in risk sentiment seems to be making it difficult for the dollar to find demand.
On Thursday, the US Bureau of Economic Analysis will release the Personal Consumption Expenditures (PCE) Price Index data for February. The Core PCE Price Index – the Fed’s preferred gauge of inflation that leaves out volatile food and energy prices – is expected to rise to 5.5% from 5.2% in January.
Inflation and Fed rate outlook
Following the FOMC’s March policy meeting, policymakers have adopted a hawkish tone by voicing their willingness to vote in favor of 50 basis points (bps) rate hikes in upcoming meetings to tame inflation.
Chicago Fed President Charles Evans said that a 50 bps hike could help them move rates close to neutral. Cleveland Fed President Loretta Mester argued that it would be a good idea to “frontload” some of the rate hikes and added that double-dose rate increases will be needed this year. On a similar note, “if we need to raise the Fed funds rate by more than 25 bps, we will do so,” FOMC Chairman Jerome Powell said.
Earlier this month, the US Bureau of Labor Statistics (BLS) reported that inflation in the US, as measured by the headline Consumer Price Index (CPI), jumped to a multi-decade high of 7.9% on a yearly basis in February, from 7.5% in January. The US Dollar Index (DXY) gained more than 1% in the next 48 hours after this data.
The CME Group FedWatch Tool shows that markets are currently pricing in a 66% probability of a 50 bps rate hike in May. In case Thursday’s report reveals that the Core PCE Price Index rose at a stronger pace than expected in February, odds of a 50 bps rate hike in May could continue to increase. In that case, the US Treasury bond yields should gain traction and provide a boost to the dollar. The benchmark 10-year US T-bond yield reached a multi-year high above 2.5% early Monday but retreated to 2.4% mid-week.
On the other hand, a soft PCE inflation print could have the opposite effect on US yields and force the greenback to stay on the back foot. It’s worth noting, however, that the February data will not reflect the impact of the Russia-Ukraine conflict on overall price pressures. Hence, investors might refrain from committing to a long-lasting dollar selloff. Moreover, the market reaction could remain muted due to the fact that the US Bureau of Labor Statistics will release the March jobs report on Friday.
DXY Technical Outlook
Following the sharp decline witnessed in the first half of the week, the Relative Strength Index (RSI) on the daily chart fell below 50 for the first time since mid-February. Confirming the bearish shift in the technical outlook, the DXY is now well below the 20-day SMA.
97.50 (Fibonacci 38.2% retracement level of the latest uptrend) aligns as key support. With a daily close below that level, the index could extend its slide toward 97.00 (psychological level, Fibonacci 50% retracement, 50-day SMA) and 96.50 (100-day SMA, Fibonacci 61.8% retracement).
On the upside, the DXY needs to rise above 98.25 (Fibonacci 23.6% retracement) and start using that level as support in order to target new multi-year highs above 99.00. The 20-day SMA near 98.50 could act as interim resistance as well.
previous
