After shedding 4% last week, greenback was offered support near the 106 level on DXY in the first half of this week and eventually rallied on Thursday:
The rally was likely driven by US October retail sales report. Headline reading beat estimates (+1.3% MoM), core sales also rose faster than expected (+0.9% MoM). The solid increase in consumption was combined with the slowing price growth in October, which means that the chances of a “soft landing” for the US economy have increased. Treasury yields rose across all maturities, with a particularly clear uptick in short-dated 2Y bills, which are more sensitive to Fed policy expectations. It looks like the retail sales report has finally convinced the market that the easing of inflation in October will not be a convincing argument for the Fed to soften the pace of tightening:
ECB top manager De Guindos also hinted at this earlier, saying that the market could have overreacted to the data.
If the current uptick in yields and dollar rebound are driven by the traders dialing back their Fed easing expectations, the general trend will likely become clear only after the FOMC decision in December, which will shed light on the key question whether the October inflation print was a “turning point” for the data-dependent Fed or more data is needed. This implies that an upside and downside potential in greenback and equities is limited before the Fed meeting. The 105.50-106 zone on the dollar index (DXY), as the first half of the week showed, acted as a support area, now a short-term dollar rally may form the upper limit of the range. The resistance zone is likely to form at 107.20-107.50, which will correspond to 1.025-1.0275 support area in EURUSD.
Source: Tickmill