US dollar supported by higher US rates in light of US CPI release

• The US dollar is generally trading in the green against the G10 basket of currencies
• Traders are sending US Treasury rates higher and US CPI data due on Thursday.
• The US dollar index is trading above 102.50 and flirting with a break above 103.00.

The US dollar (USD) is rising again this week as traders send US Treasury rates higher ahead of US (US) September consumer price index (CPI) data. Higher US rates are making the US dollar a favored carry currency again, with more traders and speculators more than happy to park their money under the Greenback and get some return in the process. It reveals some of the belief among traders that the US CPI report could see the disinflationary process of recent months stall or even reverse and return to a rise in inflation.

The economic calendar thus gathers momentum with the strong release of the US CPI on Thursday. Add in the weekly jobless claims and the markets will have some volatility. The release of the minutes of Wednesday’s Federal Open Market Committee (FOMC) meeting showed that the vast majority of Federal Reserve (Fed) voters favor a further 50 basis point (bps) rate cut, while a smaller amount voted in favor of a more gradual approach.

Daily Market Reasons: The rate differential turns on again

• US Treasury rates are rising and outperforming other sovereign rates, meaning rate differentials are widening again between the US and several other countries. This supports a stronger US dollar overall.
• At 12:30 GMT, a batch load of data points is set to be released:
  • US Consumer Price Index data for September:
    • Monthly core inflation is expected to rise 0.2%, compared to 0.3% in August.
    • In line with the core reading, monthly inflation is expected to rise 0.1% from 0.2% in August.
    • Annual core inflation is expected to remain steady at 3.2%, while headline inflation is expected to ease to 2.3% from 2.5% in August.
  • Initial jobless claims for the week ending Oct. 4 are expected to rise to 230,000 from 225,000 the previous week.
• Around 13:15 GMT, Federal Reserve Governor Lisa Cook delivers a speech on entrepreneurship and innovation at the College of Charleston School of Business’ Women for Women Summit in Charleston, South Carolina. Cook is considered quite convenient in terms of political position.
• At 15:00 GMT, Federal Reserve Bank of New York President John Williams delivers keynote remarks at an event hosted by Binghamton University in New York. Williams is considered neutral in terms of political stance.
• There is some geographic dislocation in equity markets, with Asia closing the day on a positive note, even for Chinese indices. European stocks look sluggish and in the red, while US stock futures are modest.
• The CME Fedwatch tool shows an 80.1% chance of a 25bps rate cut at the Fed’s next meeting on Nov. 7, while 19.9% ​​is priced in without a rate cut. Chances of a 50 bps rate cut have been completely eliminated now.
• The benchmark US 10-year yield is trading at 4.08%, its highest level since early August.

US Dollar Index Technical Analysis: King Dollar Makes Its Way

The US dollar index (DXY) knows no bounds and rises higher again on Thursday ahead of the US CPI release. With US interest rates rising, it should become clear that markets are beginning to have less faith in the Fed in a rate-cutting cycle. The elevated levels and likelihood of more rate cuts this year could mean a Greenback rally heading into the US election.

103.00 psychologically is the first level to be approached upwards. Above, the chart identifies 103.18 as the final resistance level for this week. Once above, a very choppy area is emerging, with the 100-day simple moving average (SMA) at 103.28, the 200-day SMA at 103.77, and the 103.99-104.00 pivot levels in play.

On the downside, the 55-day SMA at 101.94 is the first line of defense, supported by the 102.00 round level and the 101.90 pivot as support to catch any bearish pressure and trigger a bounce. If that level fails, 100.62 also acts as support. Below, a test of the year-to-date low of 100.16 should occur before more declines. Finally, and this means giving up the high of 100.00, the July 14, 2023 low at 99.58 comes into play.

US Dollar Index: Daily Chart