Inflation Data Creates Policy Uncertainty
The week began with a stronger-than-expected Consumer Price Index (CPI) report, which showed a 0.5% monthly rise, exceeding the 0.3% forecast. This pushed traders to scale back expectations for aggressive Federal Reserve rate cuts, strengthening the dollar. However, later in the week, the Producer Price Index Consumer Price Index (CPI) report pointed to lower-than-expected core inflation, causing a reversal in sentiment.
As a result, traders adjusted their expectations, now pricing in 33 basis points of rate cuts by December, up from 27 basis points earlier in the week. This policy uncertainty, combined with Powell’s “wait and see” stance, left the dollar in a volatile position.
Weak Retail Sales and Global Factors Add Pressure
US retail sales data showed a 0.9% decline in January, the largest drop in nearly two years. The weakness in consumer spending raised concerns about economic momentum and reinforced the idea that the Fed may need to ease policy later this year.
Meanwhile, optimism over a potential Russia-Ukraine peace deal supported the euro, which rose to $1.0508, marking a weekly gain of 1.7%. The Japanese yen also strengthened against the dollar, reaching 152.24 per dollar, further pressuring DXY.
Market Outlook: Key Levels and Risks Ahead
The US Dollar Index fell to 106.69 and is on track for a 1.3% weekly decline. Immediate support is seen near 106.50, with stronger technical levels around 105.20 and 103.98 if selling pressure continues. Resistance stands near 108.50, followed by the recent peak of 110.17.
Looking ahead, traders will focus on the upcoming Personal Consumption Expenditures (PCE) report, the Fed’s preferred inflation measure. Any upside surprises in PCE could reinforce rate-hike expectations and provide support for the dollar. However, continued tariff uncertainty and geopolitical developments will keep volatility elevated in the near term.
