The US dollar falls sharply below 105.00 ahead of key CPI data

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  • On Wednesday, the US dollar will weaken further ahead of the release of the US CPI.
  • The downward revision of PPI in the US for March and speculations about China’s support for the real estate sector trigger a wave of dollar weakening.
  • The US Dollar Index is falling below 105.00 and heading towards the mid-range of 104.00.

The US dollar (USD) weakens on Wednesday and falls below 105.00 ahead of the long-awaited release of the US Consumer Price Index (CPI) for April. Overnight, US Federal Reserve (Fed) Chairman Jerome Powell delivered a speech that seemed to prepare markets for the risk that an initial rate cut would not occur until after the summer or even later.

Markets ignored these comments and likely focused solely on the Producer Price Index (PPI) revisions, which were unfavorable. Additionally, news that made headlines on Wednesday is that the Chinese government is putting together a rescue package to rescue its troubled real estate sector, which appears to be putting much more pressure on the US Dollar Index (DXY).

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As for the economy, the CPI release will attract the most attention, although retail sales data for April are scheduled to be released at the same time. Therefore, investors can expect volatility to enhance, and if both numbers get mixed up or opposite, volatile price action should be expected. Traders will then be able to get guidance from Federal Reserve Bank of Minneapolis President Neel Kashkari and Federal Reserve Governor Michelle Bowman for guidance on reading the inflation message.

Daily market update: chaos expected at 12:30 GMT

  • At 11:00 GMT, the Mortgage Bankers Association will publish its mortgage applications index for the week ending May 10. The index rose 2.6% in the previous week.
  • At 12:30 GMT, the US economic calendar will include US CPI and retail sales data for April:
    • April CPI data:
      • The monthly CPI is expected to rise at the same pace as March’s reading of 0.4%.
      • The annual CPI is expected to rise 3.4% from 3.5% in March.
      • Monthly core CPI is expected to enhance by 0.3% in April from 0.4% in the previous month.
      • Annual core CPI is expected to rise 3.6% from 3.8% in March.
    • April retail sales:
      • Monthly retail sales are expected to enhance 0.4% in April from 0.7% in March.
      • Retail sales excluding cars and transportation are expected to grow 0.2% from 1.1% in the previous month.
      • Please note that amendments may have a greater impact on the market than the actual numbers.
  • The National Association of Home Builders Housing Market Index for May will be released at 14:00 GMT and is expected to remain stable at 51.
  • Business indicators for March will also be released at 14:00 GMT and are expected to reach -0.1% from 0.4%.
  • Federal Reserve Bank of Minneapolis President Neel Kashkari will speak at 16:00 GMT. He will not vote this year.
  • Federal Reserve Governor Michelle Bowman will take the stage at approximately 7:20 p.m. GMT.
  • The World Economic Forum in Qatar began on Tuesday morning. Headlines from world leaders may appear throughout the week.
  • US stocks outperformed at the closing bell on Tuesday evening, although they were unchanged before the start of the US session. European shares are slightly in the green.
  • The CME Fedwatch Tool indicates a 91.3% probability that there will still be no change in the Federal Reserve’s federal funds rate in June. The chances of a rate cut in July are also not taken into account, while in September the tool shows a 49.7% chance that rates will be 25 basis points lower than current levels.
  • The benchmark 10-year US Treasury bond is trading around 4.42%, which is the lowest level this week.

US Dollar Index Technical Analysis: CPI Is Moving Again in the Market?

The US Dollar Index (DXY) is losing ground on Wednesday and is back below the crucial level of 105.00. All eyes are on US CPI data as most market participants now expect this printout to confirm that disinflation is still ongoing. There is a risk that any beat to estimates could trigger another shock to markets, with DXY being the biggest winner as expectations point to a slowing in inflation pressures.

On the other hand, the 105.52 level (key level from April 11) needs to be reclaimed, preferably by a daily close above this level, before we reach the April 16 high of 106.52. Further up and above the round level of 107.00, the DXY index may encounter resistance at 107.35, the October 3 high.

On the other hand, the 55-day and 200-day uncomplicated moving averages (SMAs), currently at 104.69 and 104.34 respectively, have already provided ample support recently. If these levels are unable to hold, the next best candidate will be the 100-day SMA near 104.09.

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