Inflation Fears Fuel Dollar Rally: A 2024 Surge

Dollar Strength Tests Key Euro Support Zones

The U.S. Dollar Index (DXY) is on the rise, showcasing its strongest performance since early November, with a significant 4.6% increase since the start of 2024. This surge comes as persistent inflation concerns fuelled speculation that the Fed might hold on to the current rates longer than anticipated.

The Dollar Index notably jumped by 1.7% last week alone, marking its largest weekly climb since September 2022. Meanwhile, the euro has depreciated by 3.6% against the dollar this year.

This shift in market sentiment is fuelled by recent data (last week’s CPI and Core CPI) that suggested U.S. consumer prices are still on the rise, diminishing earlier expectations for significant rate cuts. Current futures markets have scaled back their predictions, now predicting a reduction of just 50 basis points in rates for 2024. It’s a stark contrast from the 150 basis points anticipated at the year’s start.

On the global stage, other central banks such as the European Central Bank, the Bank of Canada, and Sweden’s Riksbank appear more likely to ease monetary policies, diverging from previous expectations that had the Fed leading rate cuts. This divergence in monetary policies can generate interesting moves on the chart in the long term.

Economic Calendar Highlights

The calendar is rather light this week, with just a few potential market-moving events. The first and probably most important is the U.S. Retail Sales report, scheduled for release Monday at 12:30 pm GMT. Retail sales are the main gauge of consumer spending, which in turn represents the biggest part of overall economic activity.

Empire State Manufacturing Index will be released at the same time, showing the opinions of about 200 manufacturers from New York state about the overall business conditions.

Fed Chair Powell will speak Tuesday at 5:15 pm GMT at the Wilson Center’s Washington Forum, in Washington DC. It will be a discussion about economic trends in North America and it will probably have an impact on the dollar if the Chair touches on the ever-sensitive topic of inflation and rates.

The Final version of the European CPI and Core CPI will be released Wednesday at 9:00 am GMT. The first version (the Flash CPI) tends to have more impact.

The rest of the week will be sprinkled with some speeches of FOMC Members but nothing that should create a lot of swings on the charts unless, of course, surprises happen.

Technical Outlook – EUR/USD

The US Dollar bulls took the pair right into the support at 1.0635, after a clean and strong break of 1.0775. Now the pair is capped by a bearish trend line and it looks like the scales are strongly tipped in favor of the dollar.

The Relative Strength Index is touching its 30 level, which indicates oversold but it did not go below it. In other words, the pair can still go lower because it is not yet overextended. If 1.0635 is broken, price action may descend into the 1.0500 area but it will take some time to get there and we will probably see a few ups and downs until that target is reached. In the meantime, any hints about an impending rate cut would surely affect the pair.