US Dollar Index Hits 5-Week High as Inflation Worries Resurface

EUR/USD Headed for Support After Failed Breakout

The US Dollar Index (DXY) broke a 5-week high on Monday, boosted by renewed inflation worries following last week’s CPI release which showed that inflation is toning down. The University of Michigan Consumer Sentiment survey released Friday revealed that consumers’ long-term inflation projections accelerated to a 12-year high.

This brought back the possibility of a Federal Reserve rate hike in the next month. According to CME’s FedWatch tool, the probability of a hike is now 13%, as opposed to nearly zero before the University of Michigan survey came out.

Key Data for the Week Ahead

The Empire State Manufacturing Index is the first notable release of the week, scheduled for Monday at 12:30 pm GMT. It’s a survey of about 200 manufacturers that shows their opinions regarding the general level of business conditions and acts as a leading indicator of economic health

The U.S. Retail Sales come out Tuesday at 12:30 pm GMT, together with the Core Retail Sales. Some big shifts are expected, as the general consensus puts the Core version at 0.5% from the previous -0.8% and the vanilla version at 0.8% from -1.0%.

The rest of the week will be generally calm, with the Unemployment Claims coming out Thursday and a Powell speech on Friday. The Fed Chair will participate in a panel discussion titled “Perspectives on Monetary Policy” at the Thomas Laubach Research Conference, in Washington. The scheduled time is 3:00 pm GMT.

Technical Outlook – EUR/USD

After several attempts to move past 1.1000, the pair finally chose a direction and the bears are now challenging the 50-day Moving Average. Although 1.1000 was surpassed many times, the bulls lacked the strength to generate a convincing breakout.

The Bollinger Bands are expanding (moving in different directions), which shows increased momentum. This suggests that the current move will continue, at least until the bands start to curve or contract.

If the bears can close a Daily candle below the 50-day Moving Average, the pair will likely travel to the support at 1.0775. This would be a good place for a bullish bounce. The Relative Strength Index is not oversold and shows strong bearish momentum, adding to the probability of a move to 1.0775. However, bullish bounces are not out of the question until the price reaches the said support.