Dollar Index fails to sustain gains as bears eye a move below $90
- Core inflation in the States was reported at 0% in January, compared to the expected 0.2%
- “Any shift in the policy stance (to a hawkish, less accommodative side) is not imminent,” analysts say
- The dollar index closed the week lower to erase last week’s gains
The U.S. dollar slipped on Thursday on reports of soft U.S. inflation data for January, as well as the Fed’s decision to maintain accommodative policy stance.
Fundamental analysis: Inflation continues to trend lower
Core inflation in the States was reported at 0% in January, compared to the expected 0.2%. Head of the Federal Reserve Chair Jerome Powell noted that while base effects and increased demand was expected to raise inflation after economic recovery, it was likely to be short-lived.
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He also said that the Fed’s new policy framework could fit annual inflation of more than 2% for a certain period before raising rates, bolstering market expectations of bad returns from the greenback.
The dollar dropped close to 2-week lows against a group of currencies, even though the market remained quiet due to Lunar New Year holidays in Japan and China.
“Any shift in the policy stance (to a hawkish, less accommodative side) is not imminent, US front end rates are to remain anchored, the US curve is set to steepen further and real rates are to remain deeply negative,” said ING FX strategists.
“As the global economy starts its post winter recovery in Q2, this suggests more upside to cyclical currencies, while negative US real rates should also offer helping hands to the low yielding ones, such as EUR vs the dollar,” they added.
Technical analysis: Bearish weekly candle
Dollar Index (DXY) is close to ending the week 0.6% lower as bears have successfully erased all gains from the last week. This week’s price action has just confirmed that the dollar is likely to struggle moving higher in 2021.
With today’s close, it is likely that the dollar will continue moving lower in the weeks to come. The price action has returned to trade below the ascending trend line, opening the door for a move below the $90 mark again.
The dollar fell again this week on reports of soft inflation data for the last month and Fed’s decision to reiterate its accommodative policy stance. It is likely that the DXY will stay under pressure going forward.
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