US dollar set for explosive week? :: InvestMacro

• Big week ahead for USD due to CPI and Fed decision

• Fed set to hold rates but economic projections in focus

• USDInd under pressure despite recent rebound

• Key levels of interest at 105.30, 104.26 & 102.45

• Breakout/down on the horizon?

Even as the clock ticks down to the key US jobs report this afternoon (Friday 8th December), traders are mindful of the flurry of high-risk events in the week ahead.

Some of the world’s largest central banks are set to make their final rate decisions for 2023 while top-tier economic data from major economies will be in focus. Given how this will be topped off with ‘Triple witching day’ for US markets, it may be wise to fasten your seatbelts for a wild ride!

Monday, 11th December

• JPY: Japan M2 money stock
• NZD: New Zealand home sales
• GBP: CBI publishes latest economic forecast

Tuesday, 12th December

• AUD: Australia consumer confidence
• EUR: Germany ZEW survey expectations
• JPY: Japan PPI
• GBP: UK jobless claims, unemployment
• USD: US CPI report

Wednesday, 13th December

• NZD: New Zealand food prices
• EUR: Eurozone industrial production
• GBP: UK industrial production
• USD: Fed rate decision, US PPI

Thursday, 14th December

• JPY: Japan machinery orders, industrial production
• CHF: SNB rate decision
• EUR: ECB rate decision
• GBP: BOE rate decision
• USD: US initial jobless claims, retail sales, business inventories

Friday, 15th December

• CNH: China retail sales, industrial production, jobless rate
• EUR: Eurozone/Germany S&P Global PMI’s
• GBP: UK S&P Global/CIPS Manufacturing PMI
• USD: US industrial production, Empire manufacturing
• SPX500: ‘Triple witching day’ for US markets

The scheduled data releases and events may present fresh opportunities across markets. However, our focus falls on the USD Index due to the US CPI report and Fed rate decision.

The USD Index tracks how the dollar is performing against a basket of six different G10 currencies, including the Euro, British Pound, Japanese Yen, and Canadian dollar.

The USD Index could be gearing up for a significant move. Here are 3 reasons why:

1. US November CPI report

The November US Consumer Price Index (CPI) report published on Tuesday will be the final data point before the Fed rate decision.

Markets are forecasting: 

• CPI year-on-year (November 2023 vs. November 2022) to cool 3.1% from 3.2% in the prior month.
• Core CPI year-on-year to remain unchanged at 4.0%.
• CPI month-on-month (November 2023 vs October 2023) to remain unchanged at 0%
• Core CPI month-on-month to rise 0.3% from 0.2% in the prior month.

Headline inflation is expected to have cooled further thanks to falling energy prices, while the annual core inflation unchanged at 4.0% – its lowest level in over two years. Further evidence of cooling prices may bolster speculation around the Federal Reserve cutting interest rates in 2024.

• A softer-than-expected US CPI report has the potential to drag the USDInd lower.
• Should the CPI report beat market forecasts, the USDInd could push higher ahead of the Fed decision.

2. Fed rate decision

The Fed is widely expected to leave interest rates unchanged at its final policy meeting for 2023.

However, the main attraction will be the updated economic projections and dot plot which were last provided on September 20th. Together with Jerome Powell’s post meeting conference may help investors gauge what to expect from the Fed in 2024.

As of writing, traders are pricing in a 64% probability of a 25-basis point Fed cut by March 2024.

• The USDInd could find itself under pressure if the Fed strikes a dovish and signals that rate cuts are on the cards from 2024.
• Should the central bank push back on rate cut bets and signal that rates will remain higher for longer, this may give the USDInd a boost.

3. Technical forces

Despite pushing back above the 200-day SMA in recent days, the USDInd remains under pressure on the daily charts. Prices are respecting a bearish channel and trading below the 50 and 100-day SMA.

• Should the USDInd slip back below the 200-day SMA, this may open the doors towards 102.45 and 101.80, respectively.
• A solid breakout and daily close above 104.26 could push prices toward the 50-day SMA at 105.30 and 106.00, respectively.