For a second consecutive day, the dollar is saved by fresh demand – and for a second day, US inflation data misses estimates. How long can the dollar hold?
US Import Prices dropped by 0.3% in August, far below an increase of the same scale that had been expected. This publication adds to Tuesday’s Consumer Price Index figures for last month, which showed a significant cooldown in underlying prices. Core CPI rose by only 0.1% MoM, the lowest since February.
Lower inflation means the Federal Reserve could wait before tapering its bond-buying scheme – and in turn, push back on rate hikes. That is dollar-negative. Another factor that could weigh on the greenback is the surprising rise of the New York Fed Manufacturing Index. This second-tier – yet early report – for September leaped to 34.3 points, nearly double the early estimates of 18. Moreover, the inflation component also cooled.
The euro is somewhat held back by the European Central Bank’s calm approach to inflation. German member Isabel Schnabel, who said she is looking for clearer signs of inflation moving toward 2%. Headline CPI hit 4% in August, yet policymakers see it as transitory – just like the Fed doves.
Nevertheless, inflation was never a significant factor for the euro, but it is one for the dollar. While the dollar received fresh demand in the US session, this may dissipate later on. Investors will later focus on Thursday’s US Retail Sales report – a top-tier consumer indicator:
Overall, fundamentals point to the dollar falling back down.
Euro/dollar’s first attempt at 1.1835 has failed. That level provided support early in September and then capped the pair earlier this week. Moreover, it is also where the 50 Simple Moving Average on the four-hour chart hits the price.
Beyond 1.1835, the next lines to watch are 1.1855, 1.1880 and 1.1910.
Support awaits at the psychologically significant 1.18 level, which is also the daily low. Further down, 1.1770, 1.1740 and 1.1725.