Dollar Is Waiting for Inflation

The U.S. Dollar Index (DXY) is trading neutrally at 103.12 points this week, while the EURUSD is slightly up by 0.2% to 1.09400, and the USDJPY is up by 0.7% to 147.80. The currency market has stabilized after experiencing a significant volatility spike due to the unexpected rise in U.S. unemployment to 4.3% in July, as reported on August 2.

The EURUSD initially surged by 1.3% to 1.09260 on the news and saw further destabilization from brief recession fears and capital outflows to Japan, jumping another 0.9% to 1.10080 before retreating to 1.09260, where it closed on August 2. This level, around 1.09300-1.09500, now acts as an equilibrium pivot point for the Dollar. If the EURUSD climbs above this range, it could signal another rise towards the 1.10000-1.11000 resistance. Conversely, a drop below this level would indicate a potential strengthening of the Dollar.

The first scenario, where the EURUSD continues to rise, appears more likely and is supported by large investors. The WisdomTree Bloomberg US Dollar Bullish Fund (USDU) reported net outflows of $2.7 million last week, marking the third negative week out of the last four, with the week ending on August 2 being neutral. This suggests that large investors are still betting on a weaker Dollar, potentially expecting further slowdown in U.S. inflation for July. Analysts anticipate headline inflation to slow to 2.9% year-on-year from 3.0%, with monthly inflation increasing to 0.2% from -0.1%.

However, this is a complex situation, and following the lead of large investors might be risky without a clear technical confirmation of an upside trend for the EURUSD. Such a signal could emerge on Wednesday, but for now, the EURUSD needs to maintain its gains above 1.09300-1.09500 to continue its upward momentum towards 1.10000-1.11000. It’s an egg-dance.