- The index loses more momentum and breaks the 105.00.
- The US headline CPI disappointed July estimates.
- The probability of a 75 basis point rise was reduced after the data.
On Wednesday, the USD plunged to multi-week lows below 105.00 when measured by the US dollar index (DXY).
The US dollar index plunged after the release of the CPI
The index depreciated rapidly after US inflation figures showed the headline CPI rose less than initially expected in July. Indeed, consumer prices were up 8.5% and 5.9% relative to the underlying reading, both prints curbing the previous month’s upward traction.
The perception that inflationary pressures could be at or near their peak seems to have led investors to revalue the possibility of a large rate hike (75 basis points) at the next FOMC meeting in September. This view was also reflected in the sharp downward correction in US yields across the curve, which in turn added to the dollar’s daily decline.
In support of the above, CME Group’s FedWatch tool now shows that the probability of a 75 basis point rate hike in September is almost 39%, up from 70% prior to the CPI release.
Other data on the US calendar was the 0.2% increase in MBA mortgage applications in the week to August 5 and the 1.8% increase in wholesale inventories in June from the previous month.
What to watch out for around the dollar
The index suddenly came under additional pressure and is trading in the 105.00 area as market participants continue to assess the recent release of US inflation numbers.
The dollar, meanwhile, is poised for additional volatility amid investor reassurance over the Federal Reserve’s next move.
At the macro level, the dollar appears to be supported by the Fed’s divergence from most of its G10 peers (especially the ECB), combined with bouts of geopolitical turmoil and the occasional resurgence of risk aversion.
Technical levels
Now the index is down 1.13% at 105.09 and a break of 104.94 (Monthly Low Aug 10) would expose 103.67 (Weekly Low Jun 27) and finally 103.52 (100-Day SMA). To the upside, breaking above 107.42 (weekly high after FOMC Jul 27) would expose 109.29 (2022 high Jul 15) and then 109.77 (Monthly high Sep 2002).
Source: Fx Street
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