The Mighty Dollar Falls as Inflation Slows

Euro Bulls Run Into Heavy Resistance

The U.S. CPI finally dropped below expectations last week and the US Dollar was quick to answer, allowing most of its counterparts to gain control. On Thursday the US Dollar Index (DXY) dropped from a high of 110.99 to a daily low of 107.71 and Friday it reached a low of 106.28. It is currently trading at similar levels.

The Euro bulls capitalized on the Dollar’s weakness and took EUR/USD way above parity, stopping last week at a high of 1.0364. The pair is currently trading very close to the mentioned level but it seems to have trouble breaking the technical resistance at 1.0350.

During a Sunday speech, Fed Governor Christopher Waller mentioned that the pace of the rate increases will probably slow down at their next meeting but this shouldn’t be considered a “softening” of the war on inflation.

Key Data for the Week Ahead

Fed Governor Lael Brainard will speak Monday at 4:30 pm GMT at a Bloomberg news event and audience questions are expected. If the topic of the interest rate is discussed (which is very likely), expect the greenback to have a reaction.

Tuesday at 10:00 am GMT the German ZEW Economic Sentiment survey comes out, followed at 1:30 pm GMT by the New York Manufacturing Index and the Producer Price Index. These are not massive market movers but the impact can be notable if the actual numbers differ a lot from expectations.

Probably the most important event of the week will be the release of the U.S. Retail Sales and Core version of the indicator, scheduled for Wednesday at 1:30 pm GMT. This is the main gauge of consumer spending, which in turn represents the biggest part of the entire economic activity and thus, it can greatly affect the US Dollar.

FOMC Member James Bullard will speak about the economic outlook Thursday at 1:00 pm GMT, followed at 1:30 pm GMT by the release of the Philly Fed Manufacturing Index. ECB President Lagarde will speak Friday at 8:30 am GMT at the European Banking Congress; we might get some clues about the ECB’s next steps in fighting inflation, and possibly a reaction from the Euro.

Technical Outlook – EUR/USD

Since the last bounce at the bullish trend line, the Euro has been rallying furiously, shooting straight up. The CPI release had a lot to do with the way the pair has been acting but it’s worth noting that the downtrend was overextended and in need of a breather.

Strong and fast moves are usually followed by a retracement and the resistance at 1.0350 might be a good place for it. Also, the RSI is touching its 70 level, signaling that it may become overbought.

A clear break of 1.0350 (before or after the potential retracement) will show that the Euro bulls will likely control the pair’s movement in the medium term. A bounce at the current level will signal the start of the mentioned retracement, which will have the middle of the Bollinger Bands as the first target.