US Dollar Bulls Face Critical Test at 101.8 – Can CPI Trigger Breakout This Week?
2024.09.09 08:42
The kicked off the week on a positive note, reflecting market reactions to last week’s mixed labor data. The US jobs report left traders uncertain, presenting conflicting signals on the state of the economy.
August’s revealed weakness, with only 142,000 jobs added—far below the expected 165,000. To add to the disappointment, July’s data was revised down to 89,000 from an initial 114,000, deepening concerns about the labor market’s health.
Despite these weak employment numbers, two key factors added to the market’s confusion. First, the dropped from 4.3% to 4.2%, in line with expectations, offering some reassurance. Second, exceeded expectations, reducing worries about job growth due to their inflationary impact. Rising wages remain a critical focus for the Fed, as wage growth can fuel inflation—something the Fed is keen to control as it balances labor market strength with price stability.
While the market continues to digest the labor data, attention now shifts to this week’s report. The Fed, while signaling concerns about the weakening labor market, remains equally focused on inflation, which plays a key role in shaping the country’s economic outlook—whether it’s a soft or hard landing.
As we approach the Fed’s next rate decision, this week’s CPI figures will likely shape for the size of the rate cut. If inflation aligns with forecasts, the probability of a 50-basis-point cut could rise. However, if CPI misses expectations, the market may solidify around the current consensus of a 25-basis-point cut.
For now, a 25-basis-point reduction appears to be the frontrunner, with the Fed remaining cautious about signaling more aggressive easing. Markets expect headline inflation to decline from 2.9% to 2.6% on Wednesday, with the CPI report set to be the week’s most critical data release.
Trump-Harris Debate to Capture Market Attention
Beyond the economic data, the upcoming Trump-Harris debate is expected to be a key market focus. As the two presidential candidates face off on Tuesday, the outcome could influence polling numbers and market sentiment.
In the June Trump-Biden debate, Trump gained a significant lead by outperforming his rival, and this time, markets are paying close attention to how the Trump-Harris debate might shape the dollar’s trajectory. Trump’s policy stances generally suggest a stronger dollar, while Harris’ fiscal and monetary perspectives lean toward a weaker dollar outlook.
US Dollar Technical Outlook
The dollar index began the week on a cautious upward trend, continuing its recovery and reaching 101.5 in early trading. The market seems to be pricing in a 25-basis-point rate cut, but volatility could rise with Tuesday’s Trump-Harris debate and Wednesday’s inflation report.
Technically, the DXY tested the 100.5 demand zone last week, recovering as risk appetite waned following mixed US labor data. This week, the index could climb to 101.8, with the potential to rise further to 102.5 if risk appetite continues to decrease.
However, if inflation shows signs of easing and Harris gains ground in the debate, we could see selling pressure on the dollar, leading the DXY to fall below the 101.4 support level.
Weak Signals from Asia
In Asia, markets opened the week with a bearish tone. China’s dropped by 1.8%, accelerating deflation, while CPI data remained below 1%, reflecting persistent economic weakness. Japan’s Q2 growth came in at 2.9%, missing expectations of 3.2% and signaling continued challenges in Asia’s largest economies. This weak regional outlook is another factor supporting the dollar.
USD/JPY Pair Outlook
The pair found support around 142 last week, starting the week on an upward trend as Asia’s weak economic data weighed on the yen. The pair had been moving lower since hitting 161 following the Bank of Japan’s rate hike but saw a slowdown in its decline around 143 in August. US economic data pushed USD/JPY below 143 last week, but the pair has since rebounded due to Japan’s weaker-than-expected growth.
For a confirmed reversal in USD/JPY, the pair would need to break through the 145-146 resistance range with sustained weekly closes. If risk appetite increases, weak demand for the dollar could push the pair below 145, resuming its downward trend.
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