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US Dollar Firms as PMI Data Echoes Inflation Risk; Cue the Fed

US Dollar Firms as PMI Data Echoes Inflation Risk; Cue the Fed

Rich Dvorak, Analyst

US DOLLAR OUTLOOK: FLASH PMI REPORT FUELS USD BID AHEAD OF THE FED

  • The US Dollar is stronger across the board of major currency pairs Friday morning
  • US Dollar bulls trying to maintain control with the help of lingering inflation fears
  • Fed announcement next week poses notable event risk amid taper uncertainty

US Dollar price action is perking up a bit during early Friday trade. The broader DXY Index is 0.15% higher intraday thanks to sustained buying pressure in the wake of flash PMI data just released. US PMIs were mixed on the surface with robust economic activity in the manufacturing sector being undermined by slowing growth across the services sector. The manufacturing subcomponent improved to 63.1 and topped the consensus forecast of 62.0 while the services subcomponent fell to 59.8 and missed expectations of 62.0 for July.

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On balance, the headline composite PMI reading declined to 59.7 from 63.7 in June. Arguably more important, though, are the underlying details found in the latest flash PMI report. Specifically, it was noted that the pace of selling price inflation for goods and services increased at its third-sharpest reading on record as firms sought to pass on higher costs. Furthermore, output growth continues to decelerate amid widespread capacity constraints and labor shortages.

DXY INDEX – US DOLLAR PRICE CHART: HOURLY CANDLESTICKS (19 JULY TO 23 JULY 2021)

DXY Index Price Chart US Dollar Forecast

Chart by @RichDvorakFX created using TradingView

With the latest flash PMI data from IHS Markit echoing inflation risk, this could be helping boost the US Dollar, as more evidence of persistent price pressures rekindles speculation around when the Federal Reserve will taper asset purchases. That brings to focus the Fed rate decision due next Wednesday, 28 July at 18:00 GMT.

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I suspect that USD price action stays perky headed into this high-impact event risk, but at the end of the day, this could provide an opportunity to fade influxes of strength considering the likelihood that Fed officials stick to their transitory inflation narrative and err on the side of caution by leaving policy accommodative due to covid delta variant concerns.

-- Written by Rich Dvorak, Analyst for DailyFX.com

Connect with @RichDvorakFX on Twitter for real-time market insight

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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