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US dollar outlook: DXY, EURUSD, USDJPY levels to watch ahead of US CPI release

By Daniela Hathorn

13:39, 11 January 2023

Close up of $1 US dollar banknote
Close up of $1 US dollar banknote - source: getty images

It’s not been the best start to the year so far for the US dollar despite an attempted rally during the first week. The Us dollar index (DXY) is now at a 7-month low after the pullback stages on Friday post-NFP data, which showed average hourly earnings increasing just 0.3% in December, below expectations of 0.4%, with the monthly figure dropping to 4.6%, its lowest level since September 2021. 

This drop in wage prices helped fuel the dovish central bank hopefuls after the Fed cut their rate increases to 50bps in December from 75bps. Focus is now on the February meeting which takes place in 3 weeks today with market participants placing a higher chance (75% vs 25%) that the rate hike drops even further to 25bps. 

US dollar awaiting the CPI report

A data point that is going to be key in influencing the Fed’s decision is the US CPI data released on Thursday. The general consensus is for a monthly increase of 01%, unchanged from the previous month, with the year-on-year figure expected to drop to 6.5% from 7.1% in November. If so, this would be the 6th month of straight declines. Core inflation is also expected to drop to 5.7% from 6% but the monthly reading is forecasted to come in slightly higher than the previous month, at 0.3% compared to 0.2% in November. 

The market reaction to the CPI is likely to be substantial because there is so much expectation around it, which means it’s likely that most major assets will be volatile and may experience swing moves. The general feeling is that the data will in fact come in below expectations following the recent trend so I would expect some followthrough on risk-on sentiment, which has been outperforming this week given the re-opening of Chinese borders. This could lead to a drop below 102 for the DXY, at which point we’ve seen some consolidation in the past, but the key area of support could arise around 101.08, the low from May last year.

On the contrary, a higher reading has a greater potential for a move in US yields, and therefore the dollar will likely recover some momentum as markets re-price their expectations of the fed funds curve. If so, resistance will be tested at 105.40. That said, we may see some defensive USD buying heading into the meeting so the dollar may be slowly pushing higher throughout the morning. It’s also important to keep in mind that the DXY daily chart is showing a “death cross” having happened last Friday when the 50-day Sea moves below the 200-day SMA and so the technical picture continues to point lower for the path of least resistance. 

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Dollar index daily chartDollar index daily chart. Photo: capital.com. Source: tradingview

EURUSD

The Euro has been outperforming across the board so far this week and is up 2.5% against the dollar since the move on Friday but the pair has struggled over the last few sessions to break above its 61.8% Fibonacci (1.0744) of the retracement from the February 2022 highs. This area proved to be enough to halt the rally back in December before the ECB meeting so it serves to question whether tomorrow’s CPI will also be a catalyst to bounce off this level and move lower. This will be likely if we see the data coming in above expectations and invalidating the chances of a softer 25bps hike in February. If this is the case, EURUSD could dip back below 1.06 as sellers take over the short-term momentum, something they are already trying to gear up for with a flattening RSI and sideways consolidation alongside the Fibonacci resistance. 

If it breaks above the resistance then the nearest key level will be the 1.08 mark followed by 1.0935 which served as resistance back in April last year. 

EURUSD daily chartEURUSD daily chart. Photo: capital.com. Source: tradingview

USDJPY

USDJPY has been struggling to find some direction over the last few weeks so it makes me wonder whether this is the pair starting to bottom out. We saw some pullback on Friday after the jobs data but sellers failed to break to a new weekly low and so the momentum remained pretty positive heading into the week. So far we see buyers attempting to move higher but it is a shy attempt that is lacking clear conviction so we are seeing resistance around 132.60, which will be the next short-term target for buyers to retain control.

The pullback since the October highs has been significant and so we’re seeing clear signs of exhaustion in the selloff but there is too much choppiness to determine a solid direction. I expect this volatile environment to pick up towards the end of the week as the US CPI data shapes rate expectations but the path of least resistance looks to be lower, something that may be consolidated further if the 50-day SMA crosses below the 200-day SMA, forming a death cross, which seems like it could take place in the next few days. 

USDJPY daily chart.USDJPY daily chart. Photo: capital.com. Source: tradingview

Markets in this article

EUR/USD
EUR/USD
1.08442 USD
-0.00079 -0.070%
DXY
US Dollar Index
104.039 USD
-0.004 0.000%
USD/JPY
USD/JPY
154.537 USD
-0.956 -0.610%

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