US Dollar rises ahead of PPI data, after CPI-related collapse

• The Greenback dropped over 1.5% on Tuesday, its worst performance in over a year.
• Traders are quickly selling the Greenback after lower than expected CPI signals the Fed is done hiking rates. 
• The US Dollar Index tries to recover some losses ahead of PPI and Retail Sales data. 

The US Dollar (USD) is trading into a new reality on Wednesday. Lower-than-expected Consumer Price Index (CPI) numbers for October led to a tectonic shift in all asset classes of financial markets: equities jumped, commodities rallied, bonds surged and in the forex market the Scandinavian and Central-Eastern European (CEE) currencies were the biggest winners on the back of a losing Greenback.

The calendar this Wednesday is again a very packed one: US Retail Sales and Producer Price Index numbers are due to be released. Expectations are elevated after Tuesday’s inflation figures, so the data releases are likely to only dampen the recent euphoria in markets. The US Dollar Index (DXY) is expected to claw back a touch, while traders brace for any headlines from San Francisco, where US President Joe Biden will meet with ChinesePresident Xi Jinping. 

Daily digest: US Dollar erased two months of gains

• The US budget deadline is due to kick in on November 17. Sentiment was further boosted on Tuesday by growing hopes that a Us government shutdown would be avoided.
• US President Joe Biden is set to meet Chinese President Xi Jinping at the historic Filoli estate south of San Francisco on Wednesday.
• Wednesday’s calendar has kicked off with the print of the Mortgage Bankers Association (MBA)’s weekly mortgage applications which rose by 2.8% last week.
• Around 13:30 GMT, the New York Empire State Manufacturing Index for November will be released. Expectations is a less severe contraction from -4.6 to - 2.8.
• At 13:30 GMT, a big batch of data to come out:
  • The Producer Price Index (PPI):
    1. The monthly headline PPI is expected to head from 0.5% to 0.1%, with expectations ranging from -0.3% to 0.4%.
    2. The monthly Core PPI is expected to stay steady at 0.3%, with expectations ranging from 0.1% to 0.3%.
    3. The yearly headline PPI is expected to head from 2.2% to 1.9%, with expectations ranging from 1.6% to 2.2%.
    4. The yearly Core PPI is expected to stay steady at 2.7%, with expectations ranging from 2.5% to 2.8%.
  • US Retail Sales figures:
    1. The monthly figure for October is expected to head from 0.7% to -0.3%, with expectations ranging from -0.7% to 0.3%.
    2. The Retail Sales Control Group number is expected to head from 0.6% to 0.2%, with expectations ranging from -0.3% to 0.5%
    3. As always, the revisions will be more market moving than the actual numbers. So watch out for any knee-jerk reactions minutes after the new figures print.
• Around 15:00 GMT, Business Inventories for September are expected to remain steady at 0.4%.
• Equities are taking over the enthusiasm from Tuesday. The Hang Seng is the biggest winner, up over 3%. In Europe, all important European indices are near 1% in the green, while US equities futures only mildly up. 
• The CME Group’s FedWatch Tool shows that markets are pricing in a 94.5% chance,  up from 85.7% on Tuesday morning, that the Federal Reserve will keep interest rates unchanged at its meeting in December. 
• The benchmark 10-year US Treasury yield trades at 4.45%, which is a substantial move lower from the 4.64% on Monday.

US Dollar Index technical analysis: US Dollar to put up a fight

The US Dollar had its worst intraday performance in over 52 weeks, with a devaluation of more than 1.50% in the US Dollar Index (DXY). Nonetheless, traders need to watch out as the Greenback could put up a fight. Hopes for even more fading inflation are high ahead of the Producer Price Index (PPI) data, so the odds are in favor of the Greenback to at least erase some losses from Tuesday in the DXY. 

The DXY is being stopped around the 100-day Simple Moving Average (SMA) near 104.15. Expect to see a bounce from there with 105.29, the low of November 6, as the market where the DXY should try to close above for this week. From there, the 55-day SMA at 105.71 is the next market on the topside that needs to be reclaimed by US Dollar bulls before starting to think of more US Dollar strength to come into play. 

Traders were warned that when the US Dollar Index would slide below that 55-day SMA, a big air pocket was opening up that could see the DXY fall substantially, and did materialise on Tuesday. For now the 100-day SMA tries to hold, though at 103.61, the 200-day SMA is a much better candidate to look for support. Should that level even be broken substantially, a long term sell-off could get underway with the DXY falling between 101 and100.