US Dollar points to gains at end of the trading week

• The US Dollar holds on to gains for the week. 
• Another batch of US inflation data is due. 
• The US Dollar Index is expected to steady or advance this Friday.

The US Dollar (USD) digested a firm bearish move on Thursday after markets deemed the latest US Consumer Price Index (CPI) numbers as a clear cut case for the US Federal Reserve (Fed) to keep rates unchanged at its September meeting. The market reaction triggered weakness in the Greenback against all major currencies. As the dust settled, the US Dollar Index (DXY) recouped its losses and closed nearly unchanged, backed by some tail risks on the geopolitical front. 

Yet again 12:30 GMT is the hour to watch for this Friday as another inflation gauge is set to be released: the US Producer Price Index (PPI) in monthly and yearly performances for both overall and core measures. Expectations overall are for an uptick on every measure, which could support a stronger US Dollar. Last data points of importance for the week will be at 14:00 GMT, with the Michigan Consumer Sentiment Index and inflation expectations. Interesting to see in this last number if consumers are expecting inflation to abate further. 

Daily digest: US Dollar faces winds from both sides

• On the geopolitical front, there is some renewed tit-for-tat between the US and China. Torn in the eye for China was the trade deal the US and Taiwan signed, while the US issued a tech-ban on US investments towards China. Meanwhile, US president Joe Biden called China a “ticking time bomb” amidst warnings from China calling out the US to uphold current outstanding agreements and trade conditions. 
• At 12:30 GMT the US Producer Price Index (PPI) data for July is to be released: On the monthly performance, both the overall and core gauge are expected to jump from 0.1% to 0.2%. On a yearly performance, the core is expected to take a small step back from 2.4% to 2.3%, and the overall to accelerate from 0.1% to 0.7%.
• At 14:00 GMT, the preliminary Michigan Consumer Sentiment Index for August is expected to stay broadly steady at 71.0 from 71.6 a month earlier. Consumers’ inflation expectations for the next five years are expected to remain unchanged at 3%. 
• The US treasury is heading back to the markets to refinance some debt with a 4-week bill and a 30-year bond auction.
• A very mixed picture to close off the week on the stock markets: the Japanese Topix index closed up nearly 1%, while the Chinese Hang Seng is down 1%. European equities are all done over 0.5% and US equity futures are flat. 
• The CME Group FedWatch Tool shows that markets are pricing in a 90.5% chance that the Federal Reserve will pause interest rate hikes at its meeting in September. The probability jumped from 85% on Thursday after the latest US CPI print showed inflation grew at a steady pace. 
• The benchmark 10-year US Treasury bond yield trades at 4.08%,  consolidating the area above 4%. Bonds are a bit less in favor, and thus require a higher yield for investors to buy as markets are baking in the end of the hiking cycle for the Fed. 

US Dollar Index technical analysis: Hold the door

The US Dollar had a very volatile day on Wednesday, though saw the US Dollar bulls prevail at the US closing bell. The US Dollar rally for this summer is not over just yet and could still try to make a new high for August, depending on the Producer Price Index numbers later this Friday. Watch out for 102.80 as a line in the sand on the topside on the US Dollar Index (DXY) for more US Dollar strength next week. 

For the upside, 102.80 – Tuesday’s peak – is the level to test and break in order to see some more stronger US Dollar moves. This level needs to be broken should the DXY want to try to head to 103.00. Although a bit far off still, the 200-day Simple Moving Average (SMA) at 103.41 could become the new target for next week if the DXY can continue trending higher.   

On the downside, a floor is building with the 55-day and the 100-day SMA at 102.40 and 102.30, respectively. However, these levels have been chopped out quite heavily already throughout the week and could become less relevant. Should the Greenback weaken on the back of the PPI or Michigan data, the 102.00 level could come back under more downside pressure.