Short Dollar Index at Strong Resistance
The US dollar index, technical analysis compared against the seven other major FX currencies(AUD, CAD, JPY, CHF, GBP, EUR, and NZD), is at a strong resistance level, with RSI momentum levels close to being overbought.
Fundamentally and based on the analysis of various economic indicators, the US dollar appears to be leaning towards an inflationary bias, but some conflicting signals suggest potential deflationary pressures. Key points include:
Leading Indicators: PMI and Services PMI indicate a growing economy, potentially leading to inflation. However, momentum is slowing down, which could temper the inflationary outlook.
Money Indicators: M2 is historically low and bouncing higher, coupled with the decreasing interest rates (IRs) and real interest rates (Real IRs) velocity, indicating a possible shift towards looser monetary policy and an inflationary bias.
Inflation Measures: While CPI inflation is now close to average levels, the Core CPI is heading toward normality and decreasing, suggesting some downward pressure on inflation. PPI (Producers Inflation) has shown signs of bouncing higher, indicating potential inflationary tendencies.
Employment: Employment trends point to medium to low inflation expectations, as employment change is within YoY% average levels.
Considering these factors, the ultimate currency bias leans slightly towards an inflationary outlook for the US dollar. However, the mixed nature of the signals suggests a need for continued monitoring of economic indicators and policies to accurately assess the currency's direction.
The latest COT report on how Leverage Funds (Hedge Funds) are approaching the US dollar reveals an interesting trend. While the overall sentiment is still positive, there has been a significant drop from the high point seen on July 25th, 2023. This high point was actually beyond what we usually expect (it was outside the normal range). In simple terms, more funds are now betting that the dollar will weaken compared to last month. This suggests a shift in their thinking towards a potential decrease in the value of the US dollar.