CPI Rises Again

The US Dollar is starting the week on a strong footing following Friday’s hotter-than-forecast inflation release. Headline annualised CPI held steady at 3.4% as expected but the monthly data showed that core inflation rose 0.3%, more than the prior and expected 0.2%. On the back of the data, market pricing for a hike from the Fed this week has jumped to around 87% from below 70% ahead of the data. Ahead of that meeting it seems that USD is playing catch up with higher front-end rates, with the rally likely to continue into Wednesday’s meeting.

Hawkish Fed Expectations

Given the hawkish shift in traders’ expectations, it will take a firmly hawkish message from the Fed, alongside the hike, to keep USD supported on the back end of the meeting. The risk is that if the Fed hikes rates but sounds less convinced of the need for further near-term tightening, USD bulls could be left disappointed. However, with oil prices spiking again and risks from the Iran war showing no sign of abating, this could be a firmly bullish week for USD if the Fed hikes rates and issues hawkish forward guidance, stoking expectations of a further hike by year end.

Technical Views

DXY

The rally in the index has seen price breaking back above the 99.15 level, now looking like a double bottom is forming against the 98.50 lows. The key level to watch now is the 100.18 mark (and the retest of the broken bull channel). If bulls can get back above there, the picture turns more firmly bullish again putting focus on 103.20 next.