Week Ahead: Can US Dollar fend off “death cross”?

The US inflation outlook, and how it’ll impact the Fed’s plans for raising US interest rates, is set to come into sharpened focus over the coming week which also features these major data releases and events:

Monday, January 9

• EUR: Eurozone November unemployment; Germany November industrial production
• GBP: BOE’s Huw Pill speech
• USD: Atlanta Fed President Raphael Bostic speech

Tuesday, January 10

• GBPUSD: Speeches by Fed Chair Jerome Powell and BOE Governor Andrew Bailey
• World Bank set to release global economic prospects report

Wednesday, January 11

• AUD: Australia November inflation and retail sales

Thursday, January 12

• AUD: Australia November external trade
• CNH: China December CPI and PPI
• USD: US December CPI; weekly initial jobless claims
• USD: Fed speak – Speeches by St. Louis Fed President James Bullard, Richmond Fed President Thomas Barkin

Friday, January 13

• CNH: China December external trade
• GBP: UK November GDP, industrial production, trade balance
• EUR: Eurozone November industrial production
• USD: US January consumer sentiment
• S&P 500: US earnings season kicks off

 

This time last week, we contemplated whether the US dollar would falter at the onset of 2023.

So far in this first trading week of the year, the equally-weighted USD Index has held up pretty well, even testing the key 200-day SMA / 50% Fibonacci resistance levels that we pointed out in our previous Week Ahead article (published Dec 30th):

 

Still, to be fair, this article is being published before this first week of 2023 is over.

We’ve still got the marquee US nonfarm payrolls (NFP) due in just a few hours today (Friday, January 6th).

Even as we wait for the pivotal US jobs report, the astute investor and trader would already be keeping an eye on the coming week.

And looking at the charts, one can’t help but notice that the USD Index appears headed for a “death cross”.

 

What is a “death cross”?

The death cross occurs when an asset’s 50-day simple moving average (SMA) crosses below its 200-day counterpart.

Investors and traders take such an event as confirmation of the downtrend for that particular asset’s prices.

This technical event is widely viewed as a “bearish” sign, suggesting that prices would decline further after the “death cross”.

For example, the last time this USD Index witnessed a “death cross” was back in July 2020.

After such a bearish technical event, this index then fell by a further 9.7%, before reaching bottom at 1.04399 in February 2021.

 

What could push the USD Index closer to a death cross?

If the US inflation data due on January 12th comes in lower than expected, that should drag the dollar even lower.

Markets are currently expecting the December consumer price index (CPI) – which measures headline inflation – to register a 6.6% advance compared to December 2021.

If so, that 6.6% would be significantly lower from the 40-year high of 9.1% that was registered back in June 2022, though still three times higher than the Fed’s 2% inflation target.

Recall the reason for these Fed rate hikes = it’s to subdue US inflation.

 

Also, recall how the buck has been reacting to market expectations surrounding US interest rates:

• For the first 3 quarters of 2022, the US dollar drew tremendous strength from the notion that the Fed will send rates even higher, which the central bank did.
   
• The US dollar then faltered since October as markets begin to believe that the Fed is close to being done with its aggressive rate hikes.
   
• Adding to the dollar’s weakness in recent months is the idea that the Fed may even have to cut interest rates later in 2023 in order to offset the risk of dragging the world’s largest economy into a recession.

 

Potential scenarios for USD Index in response to CPI release:

1) Dollar down: If markets are given further evidence that US inflation is further subsiding, that should give the Fed less of a need to send interest rates much higher.

Such hopes may drag the USD Index back lower to the 1.170 region, and potentially see this USD Index form a death cross.

2) Dollar up: If next week’s US inflation print exceeds the market forecasts of 6.6%, that implies that the Fed has more to do to combat stubborn inflation.

Such a hawkish narrative may well send this USD Index upwards to test its 50-day SMA (around 1.20) as the immediate resistance level, while perhaps delaying the formation of a “death cross” for a while longer.

 

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