US Dollar Strengthens as Inflation Data Looms

The US Dollar Index (DXY) ended the week on a high note, despite a brief pullback on Friday following the release of the US employment report. The index, which measures the greenback’s performance against a basket of six major currencies, rose for the 11th consecutive week and closed around 106.00, its highest level since early 2020. The Dollar’s strength was supported by the upbeat US labor data, which showed that the economy added 312,000 jobs in September, beating market expectations of 194,000. The unemployment rate also fell to 4.8%, the lowest since March 2020.

Inflation Data and FOMC Minutes in Focus

The focus for the upcoming week will shift to the US inflation data and the minutes of the Federal Reserve’s latest meeting. These events are expected to have a significant impact on the bond market and the Dollar’s direction.

US Dollar Strengthens as Inflation Data Looms
US Dollar Strengthens as Inflation Data Looms

On Wednesday, the US will release the Producer Price Index (PPI), which measures the change in the prices of goods and services sold by producers. The PPI is expected to rise by 0.4% month-over-month in September, following a 0.7% increase in August. On a yearly basis, the PPI is forecast to surge by 8.7%, the highest since November 2010.

Later on Wednesday, the Fed will publish the minutes of its September meeting, where it announced that it would start tapering its monthly bond purchases “soon”, possibly as early as November. The minutes will provide more details on the Fed’s outlook for inflation, growth, and interest rates, as well as its plans for reducing its balance sheet.

On Thursday, the US will release the Consumer Price Index (CPI), which measures the change in the prices of goods and services purchased by consumers. The CPI is expected to rise by 0.3% month-over-month in September, slowing down from a 0.5% increase in August. On a yearly basis, the CPI is projected to jump by 5.3%, matching the previous month’s level, which was the highest since August 2008.

The inflation data will be closely watched by investors and policymakers, as it will indicate whether inflation is transitory or persistent, as well as how much pressure it puts on the Fed to tighten its monetary policy sooner than expected. A higher-than-expected inflation reading could boost the Dollar and push up bond yields, as it would increase the odds of an earlier rate hike by the Fed. Conversely, a lower-than-expected inflation reading could weigh on the Dollar and ease bond yields, as it would suggest that inflation is moderating and that the Fed can afford to be patient before raising rates.

Other Economic Data and Events to Watch

In addition to the inflation data and the FOMC minutes, there are other economic data and events that could influence the Dollar’s movements next week.

On Monday, the US market will be closed for Columbus Day, while Canada will also observe a holiday for Thanksgiving Day.

On Thursday, besides the CPI report, the US will also release the weekly Jobless Claims data, which will show how many people filed for unemployment benefits in the week ending October 9. The Jobless Claims are expected to drop to 320,000 from 326,000 in the previous week.

Several Fed officials are scheduled to speak next week, including Vice Chair Jefferson and Logan on Monday, Waller on Tuesday, Bowman on Wednesday, Bostic and Daly on Thursday, and Mester on Friday. Their comments could offer more insights into their views on inflation and monetary policy.

Other major economies will also release important data next week, such as China’s trade balance and inflation data on Tuesday and Wednesday respectively; Germany’s ZEW Economic Sentiment Index on Tuesday; Eurozone’s industrial production data on Wednesday; UK’s GDP and manufacturing production data on Thursday; and Canada’s employment report on Friday.

Technical Analysis: DXY Faces Resistance at 106.50

The DXY has been in a strong uptrend since June, breaking above several resistance levels along the way. The index is currently trading above its 20-day, 50-day, and 200-day Simple Moving Averages (SMAs), indicating a bullish bias.

The next resistance level to watch is at 106.50, which coincides with a horizontal line connecting previous highs from January and February 2020. A break above this level could open the door for further gains towards 107.00 and 107.50.

On the downside, the first support level is at 105.50, which aligns with a rising trendline drawn from late August lows. A break below this level could trigger a deeper correction towards 105.00 and 104.50.

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