Dollar index retreated after NFP. Will the US inflation give new direction?

The US dollar paused its recent bullish rally and retreated from a four-week high. The greenback fell as the latest US jobs report for July showed a slowdown in hiring, raising hopes of a gentle economic landing, but higher wages suggested the Federal Reserve may need to maintain interest rates higher for longer.

The dollar index, a measure of the U.S. currency against six peers, retreated from the high of 102.8430 and settled at 102.009, up 030% on a weekly basis, while on a daily basis dropped by 0.47%.The drop was the dollar’s greatest one-day drop in three weeks.

The U.S. economy added fewer jobs than expected last month. However, solid wage gains and a drop in unemployment to 3.5% signalled continued tightness in the labour market.

Nonfarm payrolls climbed by 187,000 jobs last month, according to the Labour Department’s survey of householders, which was fewer than the 200,000 predicted by economists polled by Reuters.

The currency spiked after Fitch’s downgrade of the U.S. credit rating which lifted the greenback to 102.84, its highest level in almost one month. These occurrences, combined with the Treasury’s declaration that it will increase bond issuance in the coming months, sent US rates higher this week, strengthening the dollar via the interest rate channel.

Looking ahead, sentiment will remain fragile ahead of US inflation numbers. On Thursday it will be released. Forecasts suggest that both the headline and core CPI rates will inch higher by 0.2% in monthly terms in July, which would translate into an increase in the yearly CPI rate but a decline in the core rate.

Technical Outlook

The dollar index has stalled its bullish rally, which starts from the low of 99.589 (14 July 2023). It made a high of 102.843 and retreated towards 101.7420 before closing at 102.009.

On the above chart, the dollar index is constructing a falling three-method candlestick. However, the pattern is not completed but the recent pressure is creating a probability for a seller likely to resume next week.

On the downside 101.55 will act as a decisive support and a break below will confirm a 1%-2% correction in the currency. It could test 100.50-99.80 again.

Alternatively, on the upside, a break above 102.9500 will extend the gain and it could test 103.55-104.20 very soon.

The overall trend still looks bearish according to the technical aspects, but rather than it fundamental will give direction in days to come.