DXY: what will happen after the release of the inflation report?

 
 
 
 
 
 
 

Today the dollar is weakening, and the DXY dollar index is slightly declining on the eve of the release (at 12:30 GMT) of key inflation data (for the Fed) in the US.

At the time of writing this article, DXY futures are traded near 106.07, 42 points below Friday's closing price, when the monthly US labor market report was released.

As you know, in July the number of new jobs in the non-agricultural sector of the US economy increased by 528,000, and the unemployment rate fell to 3.5%. The forecast assumed a decrease in the rate of creation of new jobs (outside the agricultural sector), to 250,000 from 372,000 in June, although the unemployment rate was expected at the same level 3.6%. The strong data improved dollar buyers’ sentiment and heightened expectations of further interest rate hikes this year by the Fed. Data on the US labor market came out after the publication of disappointing data on the country's GDP for the 2nd quarter a week earlier and slightly smoothed out the negative impact on the dollar of the negative value of GDP.

Now the dollar may get a new impetus for growth, if the expected data on inflation will exceed the forecast of the Bureau of Labor Statistics. As expected, the consumer price index (CPI), which is a key indicator for assessing inflation and changes in consumer preferences, will be released in July with a value of +0.2% and +8.7% (in annual terms).

Core CPI (food and energy excluded from this indicator for a more accurate estimate) will be released at +0.5% and +6.1% (on an annualized basis), which indicates continued inflationary pressure in the US economy.

According to many economists, "the market is underestimating the resilience of US inflation, the Fed's determination to fight it, and the necessary tightening required to achieve lower inflation."

However, the market reaction to this publication may be completely unpredictable. Instead of the expected growth, the dollar may decline if the market believes that the Fed is unable to cope with rising inflation.

DXY

Returning to the DXY dollar index, we can then say that the breakdown of the local support level of 105.00 can become a "catalyst" not for growth, but, on the contrary, for the fall of the dollar.

In the main scenario, and if the dollar strengthens, the breakdown of the local resistance level of 107.00 will be the first signal to resume long positions in the dollar and DXY futures.