Overview
The US dollar has experienced a significant decline recently, but technical indicators suggest a potential near-term rebound. This comes as the market anticipates upcoming US Producer Price Index (PPI) and Consumer Price Index (CPI) reports, alongside an important European Central Bank (ECB) meeting.
Crude Oil Shock May Be Only Part of the Story
Rising crude oil prices since early August may not fully impact PPI and CPI figures until the following month. However, early signs of inflationary pressure from oil could lead to heightened market sensitivity to any upside surprises in the upcoming inflation data.
Sticky Inflation Risks Build Beneath the Surface
Before the recent rise in crude prices, inflation indicators were already showing signs of persistence. Unprocessed intermediate goods have increased by 9.9% year-over-year, while processed goods remain high at 7.3%. This suggests that inflationary pressures are not limited to raw materials, reinforcing the likelihood of sustained inflation.
US Dollar Index (DXY) Technical Analysis
Futures traders are currently long on the US dollar, with a net position of $25.4 billion. Despite a recent pullback, this positioning could support a rebound in the dollar if the upcoming data shows stronger-than-expected inflation.
Longer-Term Dollar Bias Remains Bearish
While there is potential for a short-term bounce, the longer-term outlook for the US dollar remains bearish. The formation of lower highs in previous years suggests that any rebound may be temporary, and further downward momentum could validate this bearish bias sooner than expected.
FX Majors Point to Near-Term US Dollar Rebound Risk
From a technical standpoint, there are indicators suggesting a near-term bullish case for the US dollar index. If the anticipated catalysts materialize, we could see a pullback in EUR/USD, a bounce in USD/CAD, and potential recovery in USD/JPY.
Key technical setups include:
- A doji formation on the DXY chart, holding above the August low.
- A bullish reversal on USD/CAD, supported by a bullish RSI divergence.
- Potential oversold conditions in USD/JPY, which has seen significant declines recently.