US Dollar Forecast: USD/JPY In Focus As Inflation Data Looms

US Dollar price action gained ground across the board of major currency pairs on Monday. USD/JPY and EUR/USD, which are the two largest components of the DXY Index, advanced 23-pips and declined 16-pips, respectively. This could be explained by shifts in trader positioning ahead of high-impact event risk posed by tomorrow’s release of US inflation data. The monthly CPI report is scheduled to cross market wires Tuesday, 13 July at 12:30 GMT.

As detailed on the DailyFX Economic Calendar, headline CPI is expected to print at 4.9% year-over-year with core inflation is expected to come in at 4.0%. US Dollar bulls will likely have a keen eye out for potential upward surprises to CPI data as this stands to place more pressure on the Federal Reserve to taper asset purchases. That said, in-line or below-forecast inflation would likely spark a bearish reaction by the broader US Dollar. It seems that the latter scenario is more likely to materialize, which could provide an opportunity for US Dollar bears to consider fading recent strength.


DXY Index Price Chart US Dollar Forecast

Chart by @RichDvorakFX created using TradingView

Not to mention, FOMC officials have resolutely voiced how the runup in inflation is not only anticipated, but also likely to be transitory. Furthermore, in light of last year’s shift to average inflation targeting, the Fed is poised to ‘look-through’ temporary overshoots in inflation while maintaining credibility for its accommodative policy path. Another material upward surprise in inflation data, perhaps with a reading north of 5% on headline CPI, could complicate the transitory narrative nonetheless.

This brings to focus important technical levels that might influence DXY Index price action. Specifically, confluent resistance facing the broader US Dollar Index looks formidable between the 92.80-93.50 price zone. Invalidating this technical obstacle could open up the door for US Dollar bulls to make a push toward the 94.50-price level underpinned by the September 2020 swing high. On the other hand, technical support might be found around the 20-week simple moving average near the 91.50-price level.

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