The dollar stays firm ahead of the US inflation reports coming later today. The index is close to breaking toward its highest level in over four months. However, the rally is squeezing around a key resistance level. 

The dollar continues to dominate its peers, gaining the edge from the recent tapering comments from Fed members. The current resurgence opened up last week after the US employment reports beat the market’s estimates. It ended the week gaining 0.75%. The resurgence has continued this week as the dollar index breached 93 for the first time in nearly three weeks.

Last week, NFP recorded 943k new jobs in July, beating the 870k estimates. Also, the unemployment rate improved to 5.4% (from June’s 5.9%) – the lowest since Covid. On the tapering efforts, the Fed is expected to cut down on the excessive quantitative stimulus enforced due to Covid before the end of the year. Earlier this week, Fed Vice-Chair Clarida suggested a tapering timeline shift to the latter end of the year. Some other members of the FOMC have suggested similar progress. Therefore, the dollar should maintain the current surge for more weeks. However, today’s inflation report is also very important as higher inflation figures could discourage investors from tapering hopes.

The current inflation rate in the US jumped to 5.4% after a 0.9% rise in retail prices in June. The market expects 0.5% CPI in July and core CPI at 0.4% which should eventually adjust the core inflation rate lower. Considering the way the Fed has played down on inflation, today’s report is expected to act as a little barrier to the overall dollar strength in the medium-term unless an overly drastic surge in the July inflation data is announced.

Dollar Index (DXY) Technical Analysis

The dollar has been positive since the turn of the year. However, the resurgence is corrective and as such, one might envisage another massive decline in the coming months. However, the current correction has not yet ended and the price has not yet shown any signs of weakness. Therefore, the outlook remains bullish in the near term. However, it seems the price has hit a resistance zone as wave (v) of the last leg of the correction stays clearly on the bullish mission. Perhaps a minor dip would happen today to prepare fresh buyers to take the index to 94. The chart below shows the emergence of wave (v).

If the resistance zone holds and today’s inflation report caused a dip, traders can look forward to buying the dip option around 92.6 or 92.5. On the other hand, a bullish inflation report should eventually push the index above the current resistance zone and perhaps a retest before the lift toward 94. The effect on the index should cause an equivalent action on the major currency pairs.

EURUSD Technical Analysis

EURUSD moves in the inverse direction of the dollar index. Since July 30, the currency pair has dropped nearly 200 Pips. A bearish impulse wave is clearly emerging. Just like we expect for the dollar index, EURUSD might retrace toward the 1.175 psychological level if the inflation data is bearish on the dollar. This might renew EURUSD bearish hope toward 1.165.

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