Hot Dollar Summer

It’s been a wild ride for the US Dollar over recent months. Fluctuating Fed expectations, disappointing employment data, surging inflation and the global energy and supply-chain crisis, have all been key themes for the greenback. Now, as we start the final quarter of the year, all eyes are on the latest set of US inflation data due later today.

Fed Turning More Hawkish

The latest set of disappointing employment data out of the US last Friday struck a blow to USD bulls. However, with the broader focus on rampant inflation, the market is still well primed for the Fed to begin reducing its monetary easing this year. Indeed, recent Fed commentary has highlighted a notable hawkish shift within the central bank. An increasing number of policymakers have become concerned over the path of prices, calling on the need for tapering.

Bostic Upgrades Inflation Views

Yesterday, Fed’s Bostic cited his view that the inflationary spike underway in the US could no longer be seen as temporary and risked doing lasting damage to the US economy. Bostic noted that inflation had risen more than he and other Fed members had expected and now risked lasting longer than expected also. With this in mind, Bostic voiced support for immediate tapering and noted that he had also adjusted his dot plot forecasts too, bringing the projected lift off in US rates forward. These views were echoed by Fed’s Bullard who called for tapering to begin as early as next month, ending in Q1 2022 to give the Fed flexibility to raise rates if necessary.

All Eyes on CPI

Looking ahead to today’s data, the market is looking for headline inflation to remain unchanged month-on-month at 0.3% while core CPI is expected to rise to 0.2% from 0.1%. However, in light of the inflation readings we have been seeing elsewhere, there are firm upside risks into today’s meeting. On the back of a much weaker-than-expected September jobs report, a solid upside beat today will likely fuel a strong uptick in USD. Alternatively, given the weaker jobs report, a downside surprise today will likely dilute near term tightening risks, weighing on USD.

Technical Views

DXY

The index continues to trade higher within the broad bullish channel which has framed the rally off YTD lows. Price is now moving back above the 94.30 level, with 94.69 the next upside hurdle. With both MACD and RSI bullish here, the focus is on a continuation higher towards the channel top around 95.61. To the downside, any correction will turn focus to 93.71.