US Dollar Outlook: USD Eyes US CPI, Contrarian Indicator Signaling A Bottom?

USD Bulls Given NFP Reality Check

After the US Dollar’s merry-go-round movement following the ADP and NFP releases, the greenback is more or less looking to close the week right where we started.

The latest NFP figures had been a mixed bag. While headline data disappointed expectations, the real disappointment stemmed from the miss relative to the ADP report -- which saw USD bulls get ahead of themselves (Chart 1) on an indicator that hasn’t had the best of records in predicting the NFP report. 

That being said, the report provided a sweet spot for risk sentiment, as it alleviated the pressure that the Fed may have to consider tapering sooner rather than later.

NFP Disappoints USD Bulls

US Dollar Outlook: USD Eyes US CPI, Contrarian Indicator Signaling a Bottom?

Source: Refinitiv

US CPI and ECB Decision in Focus

Looking ahead to next week, much of the focus will be on Thursday’s line up of key risk events with both the ECB decision and US CPI report scheduled. Speaking of the latter, last month’s CPI rose to 4.2%, which had been 0.6 pts above consensus, and while this provided concerns over an inflation spike in the short-term, the Fed were quick to state that this is transitory.

The Fed’s stance on inflation will be tested yet again with the headline rate looking to rise 4.6%, although a higher than expected deviation - similar to that of last month - would likely provide a renewed bid in the USD. While my view remains that the rise in inflation will prove to be transitory, a higher than expected reading will undoubtedly fuel taper bets.

Demise of Dollar Indicator may Prompt Short-Term Bottom

Taking a look at the USD, with the ADP-fueled rally fully retraced, any hopes of significant range breaks across multiple G10 FX pairs have been put on hold for now. That said, the greenback looks to be working on a short-term bottom and with the increase in “demise of the dollar” reports being published, this might be the contrarian indicator that the USD bulls were seeking.

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