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US Dollar Drops As Inflation Reaches 39-Year High

The US dollar index is currently within the trading range set in late November. The price action has dropped towards the $96.00 price level and the internal rising trend line. This comes off the back of an inflation report that came in relatively as expected. President Biden made the point again that this high CPI reading does not contain the data from when the energy prices fell from the highs. High inflation, high prices at the pump and general hardship will be of utmost concern for Biden as politically this is damaging him.

Biden noted in a statement today that "half of the price increases are in cars and energy costs." He stated that gasoline prices are already lower than their 20-year averages in 20 states, and natural gas prices have declined by 25% from the November average. Government officials also noted a "decrease in used car prices on the wholesale market," which should serve as another positive sign, according to the president.

Biden also pointed out that progress is and will continue to be made on "pandemic related challenges to our supply chain which make it more expensive to get goods on shelves."

According to a preliminary report published by the University of Michigan, consumer sentiment across the United States improved in December compared to the previous month and exceeded market expectations.

The consumer sentiment index rose 4.5% to 70.4 points, while current economic conditions increased 1.4% to 74.6 points and consumer expectations increased 6.8% to 67.8 points. However, all three indices suffered annual declines of 12.8%, 17.1%, and 9.1%, respectively.

"The decline in how consumers have judged their current financial situation was half as large as the decline in how they judged their future financial prospects. The split is presumably due to the impact of the cash stimulus and unemployment payments," the release concluded.

The Fed has been signalling for a while now that they will speed up the tapering of the asset purchases and get to the rate hikes as soon as the labour market, and tapering, give a signal they can do so. For a few months from the June 16th FOMC meeting, the US 10-year yield had been tracking these expectations of higher rates. Now the theme would appear to suggest that as we approach the faster taper policy, the fixed income markets are calling something else, as the benchmark yield falling along with the rate-sensitive 2-year yield is showing a change in trend. The fall in the yields from US Bills and Notes is today weighing on the US dollar, so next week’s FOMC meeting will be interesting, and we may have a different trading range for the US dollar index, USDJPY and other forex crosses.

The forex heatmap is in a state of flux and giving no real directional bias, so we have to turn to technical levels on the charts for some clues for what next week may bring.

In this morning’s video, I talked about how the US 10-year yield and the USDJPY had been moving in lockstep until recently. The harder drop in the benchmark yield I would suggest would bring the USDJPY over time.

The break of market structure in mid-November was a signal that the bulls were losing control of the trend and the inability of the currency pair to reach into the deeper retracement towards the high is showing how much influence the bears currently have. 111.60-111.50 could be tested for support as it was old resistance and if it happened before next Wednesday, it would probably find the rising trendline as confluence, which would make the zone a tad stronger.

My personal bias on the EURUSD is always to the downside whilst the interest rates are so far apart from each other. However, I am open to the prospect of a breakout of the bearish wedge, to the upside, and that we could test the old support levels around 1.1550 to 1.1600 zone.

Gold should also do better if the risk of rising rates is removed in the short term, if the US dollar falls, and if we have some market disruption. Reading through the retail forums would make anyone think there is a big drive by the banks to manipulate the precious metals lower, but for me, that doesn’t serve anyone. The move out of crypto recently may have a positive impact on the traditional store of wealth and maybe these confluences get the yellow metal higher again.


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