USD forecast: Dollar up on hotter-than-expected CPI reading

Dollar edges up as US September CPI comes in higher than expected

On Thursday, the U.S. dollar index rebounded to the 106 level after data indicating that U.S. consumer prices had increased more than initially anticipated in September.

The consumer price index (CPI) in the U.S. held steady at 3.7%, slightly exceeding the market consensus of 3.6%, while the monthly rate declined by a smaller amount than expected, reaching 0.4%. Core CPI — a reading that excludes volatile food and energy prices — rose 0.3% on the month and 4.1% on a 12-month basis, both exactly in line with expectations, as noted by CNBC.

The minutes from the Federal Reserve's recent meeting, released on Wednesday, revealed the central bank's intention to maintain interest rates at elevated levels for "some time” to bring inflation back into line with the 2% target, as per Barron’s.

Nevertheless, Fed officials also acknowledged the uncertainties surrounding the economy, oil prices, and financial markets, which lend support to the idea of being cautious when determining the extent of any additional policy tightening that might be necessary.

“Participants expected that the data arriving in coming months would help clarify the extent to which the disinflation process was continuing and labor markets were reaching a better balance between demand and supply,” the minutes noted.

Markets.com Chief Market Analyst Neil Wilson provided a brief overview of the FOMC minutes in his morning overview on Thursday.

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US dollar index forecast: ING says 106.5 in sight for DXY

In his FX Daily column on Thursday, ING forex strategist Francesco Pesole issued a correct CPI forecast prior to the release of the data:

“Yesterday’s US PPI inflation figures for September surprised on the upside. The headline rate rose 0.5% month-on-month versus the 0.3% consensus while the core rate rose 0.3% MoM versus the expected 0.2%. While it doesn’t always have a direct read-through for CPI, it still makes it more likely that today’s CPI figures come in at 0.4% MoM for the headline and 0.3% for the core, above the 0.1% or 0.2% MoM readings that would be consistent with year-on-year inflation falling back to the 2% target.”

He noted that the outlook for the DXY, or the Dixie, as the U.S. dollar index is more commonly known, was positive in the near term, with a return to 106.5 likely:

“The market reaction to the higher-than-expected PPI reading was quite muted though, as the majority of investors appear to be endorsing the view that minor bumps on the disinflation road can be sustained given that higher market rates now disincentivise the Fed from hiking again. That narrative has effectively been encouraged by a number of Fed speakers now. Yesterday, Christopher Waller – a hawk – said the FOMC can watch and see what happens before taking further action on rates.

This more dovish rhetoric by the Fed has also partly overshadowed yesterday’s FOMC minutes, which signaled that members saw inflation as ‘unacceptably high.’ At the same time, the minutes showed that ‘all participants agreed that policy should remain restrictive for some time’, warning that the economic outlook was ‘highly uncertain’.

As a result, the dollar has stayed mildly pressured. We think today’s CPI print is a bigger test for USD short-term bears though, and we warn against attaching hopes of a sustainable dollar decline to declining US yields, as activity data continues to hold the key to the dollar outlook beyond the very near term. The correction in DXY may extend to 105.00, but a return to 106.50 seems more likely, in our view.”

DXY technical analysis: Key levels to watch in the short term

In a DXY technical analysis on Thursday, FXStreet contributor Filip Lagaart said the dollar forecast has started to look bleak, with 107.19 an “important” level to reach if the index wants to continue its upward momentum:

“The US Dollar has started to look bleak, and any chance for a quick recovery is hanging by a thread. Only a tick up in US inflation numbers for now did the trick and will grant the DXY another day near 106. It looks inevitable that the US Dollar Index (DXY) will need to look further down in order to find ample support before having a possible recovery bounce.

For a second day in a row, the DXY opens below 106, which means that this level will be the first initial hurdle to recapture. On the topside, 107.19 is important to reach if the DXY can get a daily close above that level. If this is the case, 109.30 is the next level to watch.”

Lagaart also noted the following downside levels as key to watch:

“On the downside, the recent resistance at 105.88 did not do a good job supporting any downturn. Instead, look for 105.12 to keep the DXY above 105.00. If that does not do the trick, 104.33 will be the best level to look for some resurgence in US Dollar strength with the 55-day Simple Moving Average (SMA) as a support level.”

At the time of writing, the dollar index was trading at 106.28, up 0.44% on the day, while the euro to dollar rate slipped to $1.0554 (down 0.61%), as per MarketWatch data.

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