Can USDInd return to 2023 high closer to 106?

After Monday’s sell-off, which was the biggest in close to two months, the US dollar index has stabilised above 104.50.

USDInd had found support recently around the 78.6% Fibonacci level from its peak-to-trough action between March through July.

All eyes now turn to this week’s main event, the latest US inflation data which gets published this afternoon.

While the next Fed meeting a week today is likely to see policymakers stand pat with regard to interest rates changes, the CPI figures will play a role in determining market confidence on the Fed outlook for Q4 2023, going into next year.

The “higher for longer” theme has gripped markets over the summer as the resilience of the US economy has shone through, while also highlighting the weakness in other areas of the global economy like in Europe and China.

This has meant markets have pushed out the timing of the first rate cut and fuelled a dollar rally of late.

Previously, traders were convinced that this would happen as early as March 2024, but now trying to price in a rate cut for June.

US CPI to send mixed signals: Headline up, core down

Today’s headline CPI is expected to rise 0.6% m/m and 3.6% y/y in August.

That’s picking up in pace versus the 0.2% m/m and 3.2% y/y in the prior month and due to higher gasoline prices.

The core CPI is seen up 0.2% m/m, matching the prior month, with the annual rate moving down to 4.3% from 4.7% prior.

That 0.2% will be the third straight month of soft underlying price pressures which will be welcomed by the Fed.

These small increases are needed to bring inflation back to target over time.

Weakness from late 2022 has yet to show up in the figures and this has the biggest weighting in the CPI basket so will be a key focus.

Risks are tilted to the upside which would boost bets on a November Fed rate hike and lift the US dollar index.

Potential scenarios

The 105.00 psychologically-important level is the obvious target for USD bulls (those hoping prices will move higher), with the recent cycle high of 105.199 lying further north.

However, if the US CPI prints come in lower than expected, nullifying the need for another Fed rate hike, that may drag this USDInd below the 78.6% Fib level at 104.509.

This may invite USDInd bears to re-test the lower bound of its May/June range around 103.80.