The U.S. dollar (DXY) is weaker in this morning’s trading ahead of the release of U.S. September CPI data. The basket of currencies is currently trading at 97.63, down a quarter of a percentage point from Monday’s close. The 2-day decline has shaved roughly half a percent off DXY and, as a result, near term support is now within striking distance.
This support is defined by former resistance at the July rally highs at 97.57, which was tested and held with the lows established October 13th and 14th. Continuing to hold this level would leave DXY well-positioned to resume its advance over the near term. On a sustained drop below this support, however, the next support on a daily basis does not come into play until the late-August/mid-September reaction highs at 96.33/96.26. The lack of support is due to the steep trajectory of the advance that has taken place this month. That said, given the longer term upside bias in the dollar, a correction as far as this support level is not expected to take place.
Additional support levels on a drop below 97.57 in the dollar are at Fibonacci retracement levels of the advance from the August low. A 38.2% retracement would push the dollar down to the 96.60 level. While such a development is not expected, a decline to this retracement would not alter the intermediate term bullish bias in DXY.
Volatility has the potential to become a factor in this morning’s trading, as the U.S. is set to release September CPI data at 8:30am EST. Consensus estimate for Sept. CPI is 0.3%, while the Core CPI consensus forecast is at 0.2%. This will be a key metric in the Federal Reserve’s decision to raise rates before the end of the year, a factor that will have bearing on the dollar and rates. As of Monday’s close, Fed Fund futures were indicating a 69.5% chance of a rate increase at the December meeting.
Following today’s release of CPI, Housing Starts/Building Permits will be released Wednesday at 8:30am EST, while Existing Home Sales are due out Thursday at 8:30am EST. This week’s schedule is also heavy with speaking engagements by Federal Reserve officials. Fed Vice Chair Stanley Fischer spoke Monday and reiterated concerns that low interest rates may leave the U.S. economy vulnerable to shocks. On Wednesday, the Fed will release its latest beige book, a review of regional economic conditions. The Fed’s Williams and Dudley will also speak this week. Other market moving events include the European Central Bank’s latest Governing Council Meeting on Thursday, while on Wednesday the Bank of Canada will announce its latest policy decision.
The dollar remains overbought on both a daily and weekly basis. Thus, a resumption of the recent advance over the near term would be considered a sign of internal strength. On a breakout above the recent high at 98.17, the next level to watch is at the February reaction high at 98.58, followed by the January rally high at 99.83, which corresponds to the upper boundary of a rising trend channel shown on the weekly chart.