Short summary
Yesterday’s US CPI figures came in slightly weaker than analysts expected. In the first reaction, the dollar went down to a low of 101.81 (dollar index = DXY). However, this dip was quickly bought again. This leaves us as smart as before and we have to continue to live with the short-term 101.75/102.85 trading range for now.
DXY Chart
A look at the interest rates
There were comments yesterday that the weaker CPI numbers were another indication that the FED has achieved its goal of limiting inflation. Although this seems to rule out another interest rate hike on 14 September (Central Bank Calendar) for the time being, the anticipation of rate cuts soon is premature. At least that is what the US interest rate market showed us yesterday, when yields also turned green again after initial bond buying.
U.S. 2 Year Treasury Note
U.S. 10 Year Treasury Note
(source: marketwatch.com; 2yrs, 10yrs)
Unfortunately, this does not allow any clear statements to be made about the possible further development of the dollar. On the one hand, a persistently high interest rate level supports the dollar in contrast to the prospect that interest rates could soon fall again. On the other hand, traders must ask themselves why the market does not want to buy 2 year US government bonds when interest rates are above 4.8%.
Obviously, the current yield is too low given a key interest rate of 5.5%. However, one could also argue that lower yields do not seem to adequately reflect the risk of 2-year US government bonds. Here, of course, we must also remember Fitch's downgrade, which all too quickly disappeared from the news pages. At first glance I would not interpret a lack of interest in US government bonds as dollar bullish.
What next?
The rally of the last few weeks has lifted the dollar back into the old 101/105 year range. At the index level, it is difficult to make a forecast here. In view of the potentially tense situation on the US bond market, the picture for the dollar is rather mixed. In this respect, I am rather skeptical that the dollar can continue its recent rally. Of course, this does not automatically apply to all dollar crosses. I look forward to analyzing the individual currency pairs with you again next week.
Have a nice weekend!
Sebbo