US Dollar Outlook Hinges on US Inflation, Setups on EUR/USD, USD/JPY, AUD/USD

US DOLLAR FORECAST – EUR/USD, USD/JPY, AUD/USD

• The U.S. dollar advanced this week, with the rebound in yields and Powell’s hawkish comments boosting its recovery
• The October U.S. inflation report will steal the limelight in the coming weeks
• In this article, we analyze the technical outlook for EUR/USD, USD/JPY and AUD/USD, examining recent price action dynamics and the key levels to watch in the near term

Most Read: US Dollar Flies on Hawkish Powell – Setups on EUR/USD, USD/JPY, AUD/USD, Gold

The U.S. dollar, as measured by the DXY index, recovered this past week after a subdued performance at the outset of the month. A rebound in Treasury yields following a disappointing U.S. Treasury bond auction and hawkish comments by Fed Chair Powell supported the greenback’s advance, which closed Friday slightly below the 106.00 handle.

Looking ahead to next week, the spotlight will be on the October consumer price index report. With the Federal Reserve hypersensitive to incoming information and mindful of potential upside inflation risk, the latest CPI figures will take on added significance and carry extra weight for financial markets. Against this backdrop, volatility could spike in the coming trading sessions.

In terms of projections, headline CPI is forecast to have risen 0.1% on a seasonally adjusted basis last month, bringing the annual rate down to 3.3% from 3.7% previously. For its part, the core indicator, which excludes food and energy, is seen increasing by 0.3% monthly, resulting in a year-over-year reading of 4.3%, mirroring September’s result.

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UPCOMING US INFLATION DATA

Source: DailyFX Economic Calendar

In his latest public appearance, the FOMC chief stated that policymakers are not confident that they have achieved a sufficiently restrictive stance to restore price stability. Powell also highlighted the uncertainty surrounding further progress in cooling inflation and noted that stronger economic growth might necessitate higher borrowing costs.

Collectively, Powell’s comments suggest that the central bank will embrace a data-centric approach in reaching future decisions. This could mean further policy firming later this year or in early 2024 if economic conditions do not evolve favorably. An upside surprise in the inflation data next week, for example, could be enough to persuade policymakers to hike again at one of their upcoming meetings.

Broadly speaking, CPI outcomes that cause a hawkish repricing of interest rate expectations should be bullish for the U.S. dollar. The opposite is also true: a weak CPI report that reduces the likelihood of additional FOMC tightening should put an end to the recent U.S. dollar rally by weighing on U.S. Treasury yields.

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EUR/USD TECHNICAL ANALYSIS

After encountering resistance at a Fibonacci level at 1.0765, EUR/USD has lost some ground, with the exchange rate now hovering above the lower limit of a support range near 1.0650. Safeguarding this floor is imperative for the bulls – failure to do so could send prices towards trendline support at 1.0555. Continued weakness raises the prospect of revisiting the 2023 lows.

Conversely, if sentiment improves and the bulls regain control of the market, the first technical barrier that demands attention appears at 1.0765, an area where the 200-day simple moving average converges with the 38.2% Fib retracement of the July/October decline. Successfully breaching this ceiling could reinforce the upward impetus, clearing the way for an advance towards 1.0840

EUR/USD TECHNICAL CHART

EUR/USD Chart Created Using TradingView

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USD/JPY TECHNICAL ANALYSIS

After a dip earlier in the month, USD/JPY has regained its upward momentum this week, breaking through a key barrier at 150.90 and climbing towards its 2022/2023 peak, just shy of the psychological 152.00 mark. With the pair pushing higher and approaching a critical level, traders should exercise caution as Tokyo may step in any minute to suppress speculative activity and support the yen.

In the scenario of FX intervention by Japanese authorities, there’s a potential for USD/JPY to swiftly sink below 150.90 and head towards 149.00. On further weakness, the focus transitions to 147.25. Conversely, if Tokyo opts to stay on the sidelines and allows the exchange rate to breach 152.00, the prospect of a rally towards the upper boundary of a medium-term rising channel at 153.40 comes into view.

USD/JPY TECHNICAL CHART

USD/JPY Chart Created Using TradingView

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AUD/USD TECHNICAL ANALYSIS

AUD/USD declined for the fifth consecutive day on Friday, erasing all gains from last week’s false breakout. Following this retracement, the pair has arrived at a crucial support zone near 0.6350. Preserving this floor is essential; a failure to do so may lead to a drop towards 0.6325. Should weakness persist, revisiting this year’s lows becomes a potential scenario.

Despite the Aussie’s recent setback, it might be too early to completely dismiss the bullish narrative. With that in mind, if the bulls stage a comeback and spark a bullish reversal off technical support, overhead resistance is located at 0.6400, with a subsequent hurdle at 0.6460. Upside clearance of both ceilings could rekindle upward pressure, ushering in a rally toward the November highs near the 0.6500 handle.

AUD/USD TECHNICAL CHART

AUD/USD Chart Created Using TradingView