US Disinflation Continues but Core Remains Sticky, Elevating Chances of a May Hike
Markets appeared to view yesterday’s CPI data with a myopic view, choosing only to see the massive progress on the headline print whilst ignoring the present issue that is core inflation. Headline inflation dropped an entire percentage point in the year-on-year print for March, but core actually rose 0.1% over the same comparative timeframe – highlighting the difficulty in taming widespread price pressures.
USD (DXY) Technical Analysis
Markets appeared motivated to sell dollars, particularly at a time when the euro appears more favourable. The ECB contemplates whether to hike the policy rate by 25 or 50 basis points in May, supporting EUR/USD which makes up the majority of the US dollar basket.
DXY appears on track to test 101.30 – a level of relevance in April and May of last year, as well as February this year. With market expectations of at least one rate cut before year end, the dollar remains vulnerable to further downside and could even test the psychological level of 100.
The dollar does, however, have the added benefit of safe-haven appeal in the event of a return to instability in the banking sector or should recession risks gain pace. The Fed, according to the latest projections envisions the potential for a shallow recession in the second half of the year. Resistance lies all the way up at 103.00, with 105.63 the next level of resistance.
US Dollar Basket (DXY) Daily Chart
Source: TradingView, prepared by Richard Snow
The weekly chart below helps to frame the current bear trend in the context of historical price action and helps to identify possible longer-term levels of support. Interestingly enough, before the 100 level, is a fair bit of support around 100.85 and then another level of support at 99.65.
US Dollar Basket (DXY) Weekly Chart
Source: TradingView, prepared by Richard Snow
Implied Path of Fed Funds Rate Points Lower
Market expectations have evolved to show a likelihood of another 25 bps hike before the supposed cuts come into play later this year, despite the Fed suggesting there will be no rate cuts in 2023. The initial pessimism arose during the banking turmoil which has largely subsided.
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