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

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

Justin McQueen, Analyst

USD FUNDAMENTAL HIGHLIGHTS:

  • USD Bulls Given NFP Reality Check
  • US CPI and ECB Decision In Focus
  • Demise of Dollar Indicator May Prompt Short Term Bottom

USD Bulls Given NFP Reality Check

After the US Dollar’s wheel merry go round following the ADP and NFP releases, the greenback is more or less closing the week where we started. The latest NFP figures had been a mixed bag and while disappointing expectations on the headline, 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 recent times in predicting the NFP report. That being said, the report provided a sweet spot for risk sentiment as it alleviates 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 on the latter, last month’s CPI rose to 4.2%, which had been 0.6ppts 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 seen rising 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 undoubtfully fuel taper bets.

Demise of Dollar Indicator May Prompt Short Term Bottom

Taking a look at the USD, with the ADP fuelled rally fully retraced, hopes of significant range breaks across multiple G10 FX pairs has 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. There have been plenty of occasions where an asset, stock or sector has performed in the complete opposite direction as to what a magazine cover had signalled. The contrarian view being that once a narrative is displayed on a magazine cover, the narrative is normally well embedded in the market and arguably run its course.

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

Source: FT

US Dollar Chart: Daily Time Frame

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

Source: Refinitiv

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