The US dollar index (DXY) is consolidating just below its May high ahead of the latest US CPI report, with inflation data set to determine whether the greenback can extend its rally. While the broader bias remains supportive of a stronger dollar, major FX pairs are sending mixed technical signals as traders assess the outlook for Fed policy, inflation and global growth.
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US Dollar Index Stalls Below May High as FX Majors Send Mixed Signals
US CPI in Focus as Dollar Rally Pauses Near May High
The US dollar’s rally has stalled just below the May high as traders await Wednesday’s US CPI report. It seems unlikely that a softer inflation reading will be delivered, although such an outcome could trigger the larger market reaction, as traders would likely send US yields and the dollar lower while increasing expectations for a Fed rate cut.
However, given the recent strength in the ISM surveys, NFP report, and elevated crude oil prices amid the ongoing conflict with Iran, I would not hold my breath for a downside surprise. More broadly, the US dollar index remains underpinned by strong bullish momentum, making at least a retest of the May high—and potentially a breakout—appear feasible over the near term.
Source: BLS, ISM, LSEG
US Dollar Index (DXY) Technical Analysis
DXY Daily Chart Analysis
The daily chart shows the rally from the May low remains strong overall, despite a loss of momentum so far this week. A small spinning-top doji formed on Monday ahead of Tuesday’s potentially bullish hammer. The US Dollar Index closed above the monthly R1 pivot point and remains well above the 10- and 20-day EMAs, which are in bullish sequence and pointing firmly higher.
Source: ICE, TradingView
DXY 1-Hour Chart Signals Further Upside Potential
The 1-hour chart shows an ABC correction has formed, with a prominent swing low hinting that the pullback may already be complete.
Ultimately, the bias remains bullish while the US Dollar Index holds above Friday’s bullish outside-day low (99.13), although there is plenty of potential support ahead of that swing low for bulls to consider buying dips. With the index sitting just below its May high and fundamentals remaining supportive, a break above 100.50 could be on the cards.
FX Majors Mixed Ahead of US CPI
Price action across the major FX pairs presents a mixed picture ahead of today's US CPI report. While the broader bias remains supportive of a stronger US dollar, several dollar pairs are approaching key technical levels that could either reinforce the greenback's rally or trigger a period of consolidation. With inflation data likely to shape expectations for Fed policy, traders may prefer to wait for the CPI catalyst before committing to the next major directional move.
Source: TradingView.
EUR/USD: With a bullish bias on the US dollar index, it is difficult to hold any outlook for EUR/USD other than bearish. It is therefore encouraging to see a potential shooting star candle form on the daily chart, with its high perfectly respecting the May low. A break below 1.1500 brings the 1.1443 low into focus for euro bears.
GBP/USD: A burst of bullish momentum saw the British pound deny bears a break of the May low, for now. However, with such a cluster of overlapping prices overhead, I do not envisage an easy breakout for bulls from here. And given that sterling bulls handed back around half of the day’s gains before the US close, I am now seeking evidence of a swing high around the HVN (1.3427) or April low (1.3448).
AUD/USD: It has been satisfying to finally see the Australian dollar hurtle towards my 70c target after numerous warnings. While bearish momentum is waning, I suspect there is a decent chance it can hold above this key level for now. However, with speculation that the RBA may have reached the peak of its cycle, and some even discussing rate cuts, a move down to the HVN near the 69c handle could also be on the cards.
NZD/USD: The New Zealand dollar shares a similar price action structure to EUR/USD, with a bearish pin bar forming within a resistance zone on Tuesday before closing back near its cycle lows.
USD/CAD: The bullish rally has been impressive and could have further to go, given bearish positioning on Canadian dollar futures is not yet at a sentiment extreme. However, with USD/CAD pausing near the March high alongside a rickshaw man doji, it may take a particularly hot set of US inflation figures to see it break convincingly higher without at least a minor pullback first.
USD/JPY: I have outlined my case for MOF intervention several times over the past couple of weeks, and a hot set of CPI figures could be the icing on the cake that forces the MOF to pull the trigger. Needless to say, bulls need to tread carefully around these historic intervention levels.
USD/CHF: A rickshaw man doji formed to show a loss of momentum below 0.8000 on the Swiss franc, although USD/CHF hardly screams overbought, which keeps it on my preferred dip-buying watchlist for now.
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-- Written by Matt Simpson
Follow Matt on Twitter @cLeverEdge
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