Dollar bruised after CPI showdown yesterday

At the balance, the US CPI report yesterday was a good one. I would argue that the key takeaway is that core components are headed in the right direction for the Fed, albeit very slowly. But when you couple that with the softer retail sales data, it ensures that rate cut bets for September are firmly on the table. And traders are also now pricing in another rate cut by December.

The dollar was battered and remains bruised in the aftermath, as risk trades soared. Treasury yields dipped heavily and that will be a key spot to watch moving forward for the dollar. While other major currencies are settling down, USD/JPY is down by another 100 pips today:

This comes as 10-year yields in the US are also down by 3 bps to 4.318%, taking a look below its 200-day moving average of 4.33%. The break below 155.00 is also resulting in added technical exhaustion on the part of buyers.

So, where do we go from here for the dollar?

The momentum is certainly building for the next leg lower in the greenback. EUR/USD is testing its April high of 1.0885 but a break of that leaves room to explore the March highs of 1.0963-81 next. Meanwhile, GBP/USD is closing in on resistance at 1.2700 next with a break of that opening up the door for a push towards the March high of 1.2893 next potentially.

It’s a cascading set of moves for the dollar with AUD/USD also trading up to its highest since January. And NZD/USD halving its losses for the year already in a push back above 0.6100.

To put short, there is scope for the dollar drop to run further – at least from a technical standpoint.

But as is the case yesterday, traders will continue to be driven by the data mostly. And today, there is the weekly jobless claims report to look forward to. Further signs of easing in labour market conditions will keep fueling the fire in broader markets.

However, with two rate cuts priced in now, is recent data enough to justify a push for three rate cuts? That’s a tough one if we are to officially rule out the June and July meetings. I reckon it will now depend on how the Fed will want to sell their story. Or if they so please, how they want to keep the status quo until the next round of big data.

In the meantime, the bond market will be the best guide in managing the dollar direction. In the case of 10-year yields, the 200-day moving average is at 4.33% with the 100-day moving average at 4.26%. It’s a critical juncture for bond sellers if they are to make a stand in the week ahead.

This article was written by Justin Low at www.forexlive.com.