US Dollar gears up for make or break moment with PPI ahead

• The US Dollar trades near Monday’s opening level.
• Markets are favouring Risk On again, forgetting about the inflation hiccup from Tuesday.
• The US Dollar Index could further dip below 104 if PPI confirms further easing ahead.

The US Dollar (USD) is telling two stories this week with, on the one hand, the recent uptick in inflation had hit a nerve in markets with a firm risk-off reaction on Tuesday. Though, the Retail Sales from Thursday show that dynamics for customers are changing with a substantial drop in numbers and the downward revision made traders completely write off the inflation report from Tuesday as a one off. This puts the US Dollar Index (DXY) flat to the same level where it opened on Monday with just one trading session left to look for direction. 

On the economic data front, the decision on where the US Dollar will be heading, will be taken on the back of two key data points this Friday: The Producer Price Index elements and the University of Michigan print. These two elements will define the outcome for this week, with overall expectations to see further easing in the price pressure and a softer US Dollar on the back of that. 

Daily digest market movers: Last bets for this week

• The main event this Friday is around 13:30 GMT:
  • This is when the Producer Price Index report for January:
    • Monthly Headline PPI is expected to head from -0.2% to 0.1%.
    • Yearly Headline PPI is seen heading from 1.0% to 0.6%.
    • Monthly Core PPI is expected to abate from -0.1% to 0.1%.
    • Yearly Core PPI seen heading from 1.8% to 1.6%
  • Building Permits should rise from 1.493 million to 1.5093 million for January.
  • Housing Starts are expected to remain unchanged at 1.46 million homes.
• Around 15:00 GMT, the University of Michigan will release its preliminary findings for February:
  • The Consumer Sentiment Index is expected to head from 79 to 80.
  • Inflation expectations were previously at 2.9%, with no forecast pencilled in.
• US Federal Reserve Board member Michael Barr is due to speak near 14:10 GMT. Mary Daly from the San Francisco Fed is due to speak near 17:10 GMT. 
• Equities are happy with the backtracking on the forward push of rate cuts and are in the green. European equities are up over 0.50%, while US equity futures are mildly in the green. 
• The CME Group’s FedWatch Tool is now looking at the March 20th meeting. Expectations for a pause are 91.5%, while 8.5% for a rate cut. 
• The benchmark 10-year US Treasury Note trades near 4.26%, roughly in the middle of this week’s range between 4.33% and 4.18%.

US Dollar Index Technical Analysis: surprise support

The US Dollar Index (DXY) briefly bounced off the 100-day Simple Moving Average (SMA) near 104.20 on Thursday. This comes as quite a surprise seeing its poor performance over the past few days and weeks. With two key elements still on the calendar this Friday, pressure could mount further and snap the 100-day SMA in the process. 

Should the US Dollar jump Friday’s data to 105.00, 105.12 as key levels to keep an eye on. One step beyond there comes in at 105.88, the high of November 2023. Ultimately, 107.20 – the high of 2023 – could even come back into scope, but that would be when several inflation measures are coming in higher than expected for several weeks in a row. 

As mentioned at the second paragraph above, that 100-day Simple Moving Average looks rather doubtful, near 104.24, so the 200-day SMA near 103.67 looks more solid. Should that give way, look for support from the 55-day SMA near 103.08.