Inflation to Determine the Performance of the Dollar and US Indices

As the US inflation release approaches, the Dollar continues to decline, and stocks rise as evaluated over the past week. During this morning’s Asian session, the US Dollar Index is experiencing significant declines. The index is down -0.34%, its most significant drop this week during this Asian session. The US Dollar has declined to its lowest level against the Euro since August 2022 and April 2022 against the Pound. Furthermore, the NASDAQ rose by 0.49%, 0.67% and the Dow Jones by 0.93% during yesterday’s session.

As previously stated throughout this week, the price movement is being influenced by a much lower inflation rate. As a result, the official inflation rate will be within touching distance from the Federal Reserve’s target, and investors would doubt the Fed would hike above 5.60%. However, investors should note that the Federal Open Market Committee has previously told the market they will not be data-dependent in this month’s rate decision. As a result, most economists believe the Fed will hike 0.25%, regardless of the Consumer Price Index. 

During this market’s futures session, global equities, including European, US and Asian, are higher as the market illustrates a clear “risk on” sentiment. However, traders and portfolio holders should note that this afternoon's price action will largely depend on the inflation data. 

Dow Jones - Inflation Data to Determine the Foreseeable Future

The Dow Jones continues to be the best-performing index in the States for a second day, appreciating 1.75% so far this week. The Dow Jones has outperformed other indices as the instrument experienced a more significant decline in the previous week and is less exposed to small-cap companies. However, technical analysts have voiced concerns about the “double top” formed over the past month. The resistance level at $34,475 will be significant and can potentially come into effect again. 

Dow Jones 8-Hour Chart on July 12th

The chairman of the Federal Reserve Bank of San Francisco, Mary Daly, confirmed that interest rates would need to be increased twice this year to sufficiently reduce inflation in a strong labour market. Another FOMC member, Loretta Mester, said that underlying inflationary pressures remain significant, pushing the US Fed to further tighten monetary policy. However, the Dow Jones will be influenced not only by the FOMC’s decisions and guidance but by how much investors believe.

Almost all economists believe the Consumer Price Index and Core Inflation data will show another decline. However, tradable assets will not be affected by decay but by the magnitude of the fall. JP Morgan Strategist, Madison Faller, advises investors to price into the market only one interest rate hike this month and then a pause. However, if the inflation rate does not decline below 3.5%, investors may see a significant change in the trend. The market expects the official inflation rate to fall from 4% to 3.1%. Higher inflation data can make the current pricing inaccurate and trigger a decline to $33,600 (1.94% decline). The Dow Jones can be under immense pressure if the CPI and PPI figures are higher than expected. An inflation rate below 3.3% and lower producer inflation can further fuel the market’s high-risk appetite. 

The Dow Jones trades above the 75-bar Moving Average, and the MACD forms three higher bars above the neutral level. In addition, Moving Averages are crossed over upwards, and the Parabolic SAR is trading below the price. All the above indicates bullish price movement, and only the resistance level concerns technical analysis. However, investors must also follow how the CPI data influences price and price action. 

EUR/USD Drops to an 11-Month Low

The Euro against the US Dollar is experiencing an increase measuring 0.12% as the European session opens. The exchange rate is now trading within its fourth impulse wave, which is, on average, the last impulse wave within a medium-strength trend. Therefore traders will be cautious of a correction to 1.09770 unless the inflation data further fuel the bullish trend, in which case investors may experience a longer-lasting bullish trend. 

Investors will be looking to determine how many rate hikes the Federal Reserve will likely set a path for. The European Central Bank is not likely to match the Fed’s hawkishness or on a rate-by-rate comparison. Statistics from the Center for European Economic Research (ZEW) negatively influenced the Euro. As a result, the Euro declined against the Pound and Yen. The Economic Sentiment Index in July in the eurozone fell from -10.0 points to -12.2 points.

EUR/USD 4-Hour Chart on July 12th 

Summary:

• The US Dollar has declined to its lowest level against the Euro since August 2022 and April 2022 against the Pound. The US Dollar Index is down 0.34% during this morning’s Asian session. 
• The Fed indicates more interest rate hikes, but investors have their attention set on today’s inflation data to determine the Fed’s path. 
• Technical analysis points towards a bullish trend for the Dow Jones, but analysts are concerned about the significant resistance level.
• Market expects the official inflation rate to decline from 4% to 3.1%, close to the Fed’s 2% target. 
• Higher inflation data can make the current pricing inaccurate and trigger a decline to $33,600 (1.94% decline).