Downward Pressure on USDX Increases as Rate-Cut Expectations Grows

Summary:

The market is now paying attention to next Wednesday's CPI data. The tenant rent and OER inflation may decline unexpectedly in the next 9 to 12 months, thus leading to a rise in rate cut expectations.

SELL USDX

EXP

EXPIRED

105.650

Entry Price

104.397

106.550

99.240 +0.170 +0.17%

Pips

EXPIRED

104.397

104.479

Exit Price

105.650

Entry Price

106.550

Fundamentals

The U.S. dollar index (USDX) fluctuated upward in the Asian and European sessions on Thursday and then fell from highs after the release of the U.S. initial jobless claims data. Finally, it gave back all intraday gains and closed down 0.28%.

The latest initial jobless claims came in at 231,000 (higher than the expected 215,000 and the previous 209,000), marking the highest level since August last year. Prior to this data, the initial jobless claims have remained between 200,000 and 222,000 over the past three months. This is in line with recent signs of a gradual cooling of the labor market. As a result, market expectations for rate cuts warmed slightly, weighing on the U.S. dollar index.

However, this data has a limited impact on the rate cut expectation. First of all, compared to the initial jobless claims, JOLTs job openings and non-farm payrolls can better reflect the labor market situation which gains more attention from the market. Therefore, the initial jobless claims are not highly watched. The second is because this market is thin this week due to fewer economic data releases. Although the Bank of England announced its interest rate decision on Thursday, its impact is limited to the British pound and the British stock market. Other currency pairs reacted little to it. As a result, the market tried to seize every opportunity to trade based on expectations, and the initial jobless claims data is certainly a good choice.

Several Fed officials delivered speeches in the previous trading days. In summary, the current Fed is divided over interest rate cuts. Atlanta Fed President Daly spoke yesterday. Unlike other officials who commented on whether and when rates would be cut this year, she just talked about inflation and the labor market. Daly said that the current restrictive monetary policy is depressing economic activity, but more time is needed for the current restrictive rates to bring inflation down to the 2% target. She thought it is far too early to declare the labor market is weak. Daly shared a similar view with Powell who said last week that rate cuts are delayed but not ruled out.

The market has now begun to shift its attention to next Wednesday's U.S. CPI for April. The Fed has significantly tightened monetary policy compared to previous cycles. But the crucial real estate market has been more resilient to the tightening policy than it was, and this has been the underlying reason for the rebound in inflation in recent months. As it stands, this problem may be "temporarily" solved.

Looking at the model of new tenant rents and all tenant rents built by the Federal Reserve and the Bureau of Labor Statistics researchers, the rise in housing inflation in the first quarter is abnormal, and the downward pressure will come in the next few months. Data shows the Owners' equivalent rent of residences (OER) was 0.48% MoM in Q1 2024. This is important because the OER accounts for 33% of the core CPI, so such a decline would lower the core CPI by 0.06% MoM. It means that the variable would fall with the expectation that if more goods inflation cooled more than expected, then the core CPI inflation would fall from an expected 0.3% (MoM) to 0.2% or even lower.

In short, tenant rent and OER inflation (accounting for 43% of the CPI) may decline unexpectedly in the next 9 to 12 months, due to the lag in the data. As the Bureau of Labor Statistics' data on new tenant rents and all tenant rents are quarterly data, it may be right about quarterly changes but wrong about monthly patterns.

The market has now begun to gradually hold that expectation, which means that downward pressure on US indices will gradually increase over the next few trading sessions. It may be due in part to the unwinding of positions caused by the expectation as well as the growing rate-cut expectations.

Technical Analysis

In the 4-hour chart, the dollar index dropped back after hitting the top of the downward channel. At present, the U.S. dollar index sees strong resistance from the 0.236 Fibonacci retracement level as well as the upper edges of the downward and upward channels. These three resistance levels form a short-term "resistance zone". If the USDX breaks above the "resistance zone", it is expected to hit the top of the previous oscillation range (106.428). Strong support is at the bottom of the downward channel (104.942), and the key resistance is the 0.382 Fibonacci retracement line. A break below this line will open a new downtrend.

As for indicators, the base line of the Ichimoku Could is running horizontally, and the conversion line is above the base line. The current price has fallen below the base line. The market should watch whether the conversion line will follow the price. If it does, the U.S. dollar index will decline in the short term. If the price moves close to the turning line, the USDX will first rise and then fall. In the DMI, +DI and -Di are sticking together, and +DI is below -DI at 19.68, showing that the USDX will move up further before a downtrend.

Overall, the dollar index is likely to decline in the short term. Investors can short USDX after a rise instead of adding short positions in a downtrend.

Downward Pressure on USDX Increases as Rate-Cut Expectations Grows_1

Trading Recommendations

Trading direction: Short

Entry price: 105.65

Target price: 104.397

Stop loss: 106.55

Support: 104.942, 104.397

Resistance: 105.714, 105.929, 106.428

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