Dollar Rally Faces Inflation and Jobs Data Test

EUR/USD breaks below 1.1400 as oversold RSI raises rebound risks

The US Dollar continued to strengthen after the Fed decided to increase the interest rate to 4.0%, and the US Dollar Index (DXY) reached multi-month highs. Against the euro, the dollar pushed below the 1.1400 threshold, which was a barrier that confined the price for a very long time, although it appeared to be broken several times.

Better-than-expected US economic data pushed the odds of another 25 bps hike as high as 75% at one point last week. However, that probability has come down since then, and currently, markets see a 64% chance of further tightening at the October Fed Meeting, according to the CME FedWatch tool.

The rate odds are likely to change again during the week, mostly because two of the most important US economic indicators are due for release: the PCE Price Index and the Non-Farm Payrolls (NFP) report. These are the main gauges of inflation and jobs, respectively, and they both have a massive influence on the dollar.

Economic Calendar Highlights

The week starts with the testimony of ECB President Christine Lagarde, scheduled for Monday at 1:30 pm GMT. She will testify before the Committee on Economic and Monetary Affairs of the European Parliament, and volatility is often experienced during such events.

The US Core PCE Price Index will be released on Wednesday at 12:30 pm GMT, showing changes in the price consumers pay for goods and services, excluding food and energy. It is the Fed’s preferred inflation gauge, and it has a high impact on the dollar because higher PCE values can influence the Fed to tighten monetary policy (by hiking the interest rate).

The US Non-Farm Payrolls report will be released on Friday at 12:30 pm GMT. The Average Hourly Earnings and Unemployment Rate will be released at the same time, and together, the three indicators paint an accurate picture of the US labor market. A thriving job market usually signals to the Fed that the economy can sustain a higher interest rate. The release has a significant impact on the US Dollar.

Technical Outlook – EUR/USD

The pair broke 1.1400 support late last week, but this has happened a few times in the past, and the move did not follow through. The Relative Strength Index (RSI) is very close to oversold, which is an early indication that we may see a bullish move.

If the price returns above 1.1400 once again, the bearish break will be invalidated, and the pair may return to test the moving averages that are currently above it. However, if the rate odds go up, this would likely strengthen the dollar further, sending the pair closer to 1.1200 support.