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US Dollar Outlook: Bullish

• The US dollar, as measured by the DXY index, rallied in the week and traded near multi-year highs heading into the weekend.
• The near-term outlook remains bullish for the greenback.
• June US inflation data next week could be a positive catalyst for Treasury rates and the DXY index.

The US dollar, as measured by the DXY index, had another strong week, rising more than 1.7% to close near 107.00, one of its best levels since late 2012. While bullish momentum may be overextended after a year-to-date advance of nearly 12%, the broader outlook remains constructive, at least from a fundamental standpoint.

Since mid-June, US Treasury yields have repriced lower on the assumption that the US central bank would blink and pivot to prevent a significant economic downturn. However, the Fed has not given any indications that it intends to step on the brakes. On the contrary, policymakers have signaled that they will press ahead with their plans to remove policy accommodation aggressively in their effort to restore price stability.

Despite the ongoing headwinds, macro-related data have held up well, particularly from the labor market, with the latest NFP survey confirming this assessment. For context, the June non-farm payroll report showed a net gain of 372,000 jobs, well above consensus expectations of a 268,000 increase, a sign that hiring conditions remain solid.

With employers still adding workers at a healthy pace to meet customer demand, fears that the economy is headed off the cliff into the depths of a recession may be overblown. Against this backdrop, the Fed may retain a hawkish stance and stay the tightening course, at least until there is resounding evidence that inflationary forces are easing decisively.

We’ll get a better picture of the inflation profile next week when the US Bureau of Labor Statistics releases the June consumer price index. Headline CPI is expected to rise 1.1% month-over-month, bringing the annual rate to 8.8% from 8.6%, a new cycle high. Gasoline prices set fresh records in the first half of last month, so the results could surprise to the upside on the back of soaring energy costs.

Another red-hot CPI report, like the one in May, should boost bets for super-sized hikes at upcoming FOMC meetings and put upward pressure on the terminal rate, which now stands at around 3.58% according to Fed funds futures (April 2023 contract).

In the current environment, the US dollar is likely to maintain a bullish bias, especially if US Treasury yields stage a strong recovery in the very near-term after their recent correction. Having said that, traders should prepare for the possibility of the DXY index lurching towards new multi-year highs in the coming week.

US Dollar Weekly Chart (DXY)

DXY Chart Prepared Using TradingView

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