Thegreenback’s attempts to recover after July US CPI report proved to beunsuccessful in the second half of the week. After forming a weekly peak at93.15 on Wednesday, DXY tumbled on the report. Following a failed attempt togain a foothold on above 93 level Thursday, it resumed its slide on Friday asbuying pressure eased on lack of short-term catalysts.

However,upside potential for DXY remains abundant in the second half of August thanksto upcoming Fed announcements and inflation developments. US macro data releasedon Thursday again drew attention to inflation risks. In particular, productionprices rose in July at the fastest pace in more than a decade - 7.8% YoY. Ofcourse, last year's low base made decent contribution to the growth but, whatis important is that production prices during periods of economic recovery arethe leading indicator of consumer inflation. Firms raise consumer prices inresponse to rising costs as they feel that their pricing power increases. Thisis especially true in the pickup phase of current economic cycle driven by stimulus-fueledconsumer demand. Therefore, although the CPI for July hinted that annualinflation most likely passed its peak, it may take longer for it to return to acomfortable range for the Fed with an average of 2%. This increases the risk ofproactive Fed approach. Markets also took the data on unemployment benefits withcaution. Another low in continuing claims and improvements on the side ofinitial claims, which increases chances for strong August NFP report and moreinflation thanks to strong wages.

TheFed is expected to announce a plan to taper bond purchases in September, with correspondinghints at the upcoming Jackson Hole conference in August. While the Fed ChairJeremy Powell has stated on several occasions that the surge in inflation istemporary and does not require a policy response, other officials haveexpressed growing concern about rising prices and resilience of inflation.Overall suggesting it may be more reasonable to act sooner than later.Therefore, despite disappointment in inflation, the dollar is declining reluctantlyas there is big news ahead.

Froma technical point of view, the dollar index faces the dilemma of returning backinto the medium-term wedge pattern or trying to stay above its upper boundafter a breakout. The price has been forming this pattern for several months,and before the US CPI report this week, the upper border was broken:

Ifthe price does not manage to gain a foothold above the resistance line, thedollar may come under more bearish pressure next week with the closest bears’ targetat 92.50 level. However, betting on USD recovery ahead of Jackson Hole meetingmakes sense as risks are skewed towards hawkish Fed shift which should supportbond yields rally as well as USD demand.