Sharp Inflation Spike to Drive Yields, USD Higher

US Dollar, DXY, Inflation Prints, Base Effects, Federal Reserve – Talking Points:

  • Equity markets gave up early gains into the close of the APAC session as investors await upcoming US inflation data.
  • A marked spike in CPI could drive the US Dollar higher against its major counterparts.
  • Golden Cross moving average formation hints at further upside for the US Dollar Index (DXY).

Asia-Pacific Recap

Equity markets pegged back early gains during Asia-Pacific trade as investors look ahead to the start of the US corporate earnings season and a flurry of much-anticipated economic data releases. Australia’s ASX 200 nudged marginally higher, Japan’s Nikkei 225 climbed 0.72%, and Hong Kong’s Hang Seng Index rose 0.31%. China’s CSI 300 dropped 0.36% on tightening monetary policy concerns.

In FX markets, the risk-sensitive AUD, NZD and CAD slipped lower, while the haven-associated USD outperformed its major counterparts. Gold prices slid lower as yields on US 10-year Treasuries gained 2 basis points, and oil rose just under 0.5%. Looking ahead, investors’ attention will be intently focused on upcoming US inflation data, with several Federal Reserve member speeches also highlighting the upcoming economic docket.

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Inflation Spike to Drive USD Higher

A flurry of strong economic data release may prove to be a driving force for the US Dollar in the coming days, as base effects come into play. Headline inflation is expected to spike to 2.5%, while the core inflation rate is forecast to climb to 1.5% in March.

Although this notable climb in consumer price growth is expected to be transitory by the Federal Reserve, a larger-than-expected print could reignite the tapering saga that drove Treasury yields to 12-month highs at the tail end of March.

$54 billion worth of 10- and 30-year Treasury auctions could also ignite a fresh wave of selling in US debt markets, and in turn drive the Greenback higher against its major counterparts.

US Dollar Price Forecast: Sharp Inflation Spike to Drive Yields, USD Higher

However, the prospect of a smaller infrastructure package than the originally proposed $2.25 trillion could cool inflation bets and dull the downward pressure on US Treasuries. President Joe Biden has hinted that he could favour a smaller package in a sit-down with a bipartisan group of policymakers.

Indeed, 5-year inflation expectations have turned lower in recent days, sliding 6 basis points since peaking at 2.20% on March 31. Nevertheless, with retail sales figures expected to come in hotter-than-expected, on the back of stimulus cheque spending, renewed inflationary fears seem more than likely.

US Dollar Index (DXY) Daily Chart – Golden Cross Hints at Further Gains

US Dollar Price Forecast: Sharp Inflation Spike to Drive Yields, USD Higher

Chart prepared by Daniel Moss, created with Tradingview

From a technical perspective, the US Dollar Index (DXY) is poised to climb higher as prices remain constructively positioned above key psychological support at 92.00.

With the RSI and MACD tracking above their respective neutral midpoints, the path of least seems skewed to the upside.

A daily close above the 8-EMA (92.33) is required to carve a path to challenge the yearly high (93.44), with a convincing break above bringing the 38.2% Fibonacci (94.47).

On the other hand, collapsing below the 34-EMA (92.03) could trigger a pullback to the March 18 low (91.30).

US Dollar Index (DXY) 4-Hour Chart – Bullish RSI Divergence Could Trigger Upside Break

US Dollar Price Forecast: Sharp Inflation Spike to Drive Yields, USD Higher

Chart prepared by Daniel Moss, created with Tradingview

Zooming into the four-hour chart paints a rather mixed outlook for the DXY, as prices consolidate within a Descending Triangle just above psychological support at 92.00.

Bullish RSI divergence, and a bullish MACD crossover, suggests that the path of least resistance is higher however, prices are continuing to track below all three longer-term moving averages.

Nevertheless, a break above the triangle hypotenuse and sentiment-defining 144-EMA (92.32) likely triggers a topside push to challenge key resistance at 93.00, with a push above bringing the yearly high (93.44) into play.

However, breaching triangle support could open the door for sellers to drive the index back towards 91.36.

— Written by Daniel Moss, Analyst for DailyFX

Follow me on Twitter @DanielGMoss

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