The U.S. dollar had a remarkable week, seeing an increase of around 0.65% to reach 103.63 over the past five days of trading.
This rise allowed the greenback to fully recover from the losses it faced in January, Investors King research showed.
The boost was mainly driven by a significant rise in Treasury yields across the board, fueled by expectations that the Fed will have to keep raising borrowing costs to fight against inflation.
The 2-year and 10-year bond yields hit their highest point in four weeks, as traders adjusted their monetary policy expectations due to the revised terminal rate of 5.17%, which was previously 4.92%. This change was indicated by the 2023 Fed futures contracts.
Strong employment data has shifted the perspective on Wall Street, causing traders to reevaluate their predictions for Federal Open Market Committee (FOMC) hikes, due to the American economy’s remarkable resilience and ability to handle further tightening. The January jobs report showed that U.S. employers added 517,000 jobs, nearly double the expected amount, which could lead to upward pressure on wages and household spending.
The latest inflation report from the U.S. Bureau of Labor Statistics, set to be released on Tuesday, will give a clearer picture of consumer prices. Both headline and core Consumer Price Index (CPI) are expected to have risen by 0.4% on a seasonally adjusted basis, which would reduce the annual rate to 6.3% and 5.5% respectively.
However, this improvement could disappoint expectations due to a sudden surge in gasoline prices, which rose by 4.4% at the start of the year, according to the American Automobile Association. If the CPI does not meet expectations, traders may revise their predictions for the terminal rate, leading to higher yields and further strengthening the U.S. dollar in the coming weeks.
From a technical analysis perspective, the U.S. dollar index appears to be approaching a crucial resistance level near 103.80/104.00 after its recent rebound. If this level is breached, the bulls may push the dollar higher towards 104.65 and 105.60. On the other hand, if prices are rejected, initial support can be found around the 103.00 handle, created by a long-term rising trendline.