Tapering by Year-End Still on the Table

Dollar Inches Higher, 

by Bogdan Giulvezan,

The greenback started the week on a firm footing, boosted by renewed hopes that the Fed will start tapering asset purchases sooner rather than later. The US Dollar Index (DXY), which measures the performance of the dollar against a basket of major currencies, climbed to 92.880 on Monday, a level last reached on August 27.

Philadelphia Fed Chief Patrick Harker became the latest Fed official to publicly state his desire to start tapering this year. The official said in a Nikkei interview: “I’d like to start the taper process soon, so that we can finish the tapering process, so if we need to increase the policy rate, we have the room to do that. And I think we need to buy ourselves that option.”

The short-term focus for FX traders shifts to U.S. inflation data due this week, but also retail sales numbers that will come out towards the end of the week.

Key Events for the Week Ahead

The first release of the week will be the U.S. Consumer Price Index (CPI) and Core CPI, both scheduled for Tuesday at 12:30 pm GMT. The expected change for the CPI is 0.4% (previous 0.5%), while the forecast for the Core version is 0.3%. Both versions of the CPI are gauges of inflation, with significant weight in the Fed’s decision regarding tapering.

The last major event of the week will be the release of the U.S. Retail Sales numbers, scheduled for Thursday at 12:30 pm GMT. This is the main gauge of consumer spending, which in turn accounts for the biggest part of the economic activity, thus it has a hefty impact on the currency. The forecast is a -0.8% change for the vanilla version and -0.2% for the Core version (which excludes automobiles from the calculation).

Technical Outlook – EUR/USD

After the picture-perfect rejection at 1.1900 resistance, the bears took over and managed to take the pair into the support zone created by the 50 days Moving Average and 1.1800 horizontal level.

At the time of writing, this confluence zone is not clearly broken but we can definitely see there’s bearish pressure and that price is heading south. A Daily candle close below the level will signal a true break and will open the door for lower prices, possibly into 1.1800 territory.

The MACD is gearing up for a bearish cross and the Relative Strength Index is headed down, after signaling bearish divergence (price made a double top and the indicator printed a higher high). These are additional signs that the US Dollar may win this week’s battle but a lot will depend on the inflation and retail sales numbers and how the market interprets them.