The bullish bias remains as the hot CPI will continue to feed the Hawkish path

US DOLLAR FORECAST: BULL

• The US dollar, as measured by the DXY index, records another positive week, supported by higher Treasury rates
• Bond yields rose amid higher-than-expected US inflation
• Sustained high inflation pressures will keep the Fed on the lookout for additional rate hikes, supporting the dollar

Most read: US inflation at 8.2%, dollar and S&P 500 diverge on hot CPI

The U.S. dollar, as measured by the DXY index, rose about 0.45% last week to 113.25 ahead of the weekend, supported by a jump in U.S. Treasury yields after hotter-than-expected U.S. inflation data. While the title the annual CPI slowed modestly in Septemberthe headline measure rose to its highest level since 1982 at 6.6% from 6.3% in August, suggesting that price pressures remain high in the economy.

With inflation risks tilted to the upside, the Fed is likely to continue raising interest rates quickly in the coming months, even as an aggressive tightening cycle triggers painful recession. Indeed, policymakers are now less concerned about the rapid deterioration of the growth profile and appear to be prioritizing the price stability part of their mandate.

In the current environment, it would not be surprising if the expectations from FOMC the terminal rate rises slightly higher than in the futures market, and traders begin to abandon a more restrictive monetary policy, ruling out the “turnaround theory” for the time being. This script should benefit of the US dollar to the extent that it will propel bond yields higher while strengthening the currency’s “carry premium” relative to global peers.

2023 FED FUTURES HIGHER RATES

Source: TradingView

From a technical analysis perspective, the DXY index is hovering just below key resistance around 113.85 after Friday’s rally. If the bulls manage to push prices above this barrier in the coming sessions, we could see a move to a multi-decade high at 114.77 and then 116.40, the upper limit of the short-term rising wedge. On the other hand, if the sellers come back and trigger a bearish reversal from the current levels, initial support will appear at 111.00/110.90. On further weakness, the focus shifts lower to 109.80.

US DOLLAR (DXY) TECHNICAL CHART.

DXY chart prepared using TradingView

EDUCATION TOOLS FOR TRADERS

• Are you just starting out? Download the program for beginners a guide for FX traders
• Would you like to learn more about your trading personality? Take it DailyFX Quiz and find out
• IG’s customer positioning data provides valuable insight into market sentiment. Get a free guide on how to use this powerful trading indicator here.

— Posted by Diego Colman, DailyFX Market Strategist