Dollar Under Pressure

The US Dollar has turned sharply lower again this week, continuing the losses seen into the back end of last week and seemingly putting an end to the recent recovery rally. The greenback has shed around 1.5% from the February highs, with the DXY reversing from highs around d$91.50 to current lows around the $90.30 level. The weaker than expected January US labour report saw selling kick in on Friday, with further data weakness this compounding the selling pressure this week.

Inflation Disappoints

The latest round of US CPI data, released yesterday, came in below expectations. While the headline figure was in line with forecasts at 0.3%, month on month, the core figure came in at 0%, undershooting expectations for a 0.2% reading. Along with January’s reading, the December 0.4% headline reading was revised lower to 0.2%, taking some of the shine off that performance and raising further questions about the anaemic state of US consumer prices. While still well above the -0.7% registered during the height of the pandemic, headline CPI is still below the 0.5% highs registered during summer 2020, suggesting very little chance of the Fed revising its approach in the near term.

Dovish Comments From Powell

Along with the weak CPI release, traders also heard from Fed chairman Powell yesterday. Speaking at the Economic Club of New York, Powell stressed the urgent need to address the US employment crisis, involving the efforts of the nations to secure jobs for soldiers returning from World War Two. Commenting on the severity of the situation, Powell said: “Given the number of people who have lost their jobs and the likelihood that some will struggle to find work in the post-pandemic economy, achieving and sustaining maximum employment will require more than supportive monetary policy. It will require a society-wide commitment, with contributions from across government and the private sector.”

Fed & Govt To Boost Economy

These comments from Powell reflect the shift in the Fed’s priorities over the course of the Trump administration from inflation targeting to employment maximisation. Additionally, Powell’s calls for “a national strategy to make the U.S. economy as big, and to make the prosperity the U.S. has as broadly shared, as possible” are very much in line with the significant stimulus Biden is attempting to push through and show that the central bank and the administration are far more aligned that during Trump’s presidency. This suggests there is far more likelihood of the economy receiving the help it needs, boosting the chances of a solid recovery over 2021.

Technical Views

DXY

The Dollar Index ran into selling pressure as it approached the 91.74 resistance and bearish channel top. Price is now testing the 90.50 level as support. While this level holds, there is stills cope for price to continue higher. However, in light of the longer term downtrend, a break here should see price quickly retesting the 89.36 lows.

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