US Dollar Outlook: Technical Case for USD Bounce as PPI and CPI Loom

The US dollar has fallen sharply, but the technical picture across DXY and several FX majors is beginning to hint at near-term rebound risk. With US PPI and CPI due alongside an ECB meeting, the stage is set for a potential catalyst, particularly if inflation data surprises to the upside.

 

US Dollar Outlook: A Technical Case for a Bounce as PPI and CPI Loom

We’re heading into the juicier part of the week for forex traders, with an ECB meeting and US inflation reports lined up, including producer and consumer prices.

Though while a 25bp ECB hike is fully expected, traders will pay close attention to any forward-guidance clues from the updated economic forecasts or comments from Lagarde. History suggests they may not be overly revealing, as policymakers are really hoping Middle East tensions recede for the hundredth time.

That could pave the way for some two-way volatility on EUR/USD without delivering a decisive move, with the ECB interest rate decision potentially becoming more of a confirmation exercise than a meeting of revelations.

Crude Oil Shock May Be Only Part of the Story

Inflation reports from the US could also be more of a tease than anything. Crude oil prices have been rising since the early August low, though much of their gains may not become apparent in PPI or CPI figures until next month’s reports. So, we may see early signs of oil-driven inflationary pressure without it becoming a sledgehammer.

That said, I expect money managers ‘of size’ will already be factoring this in, which means markets may be more sensitive than usual to any upside surprise in this week’s inflation data.

Source: BLS, ICE, LSEG

Sticky Inflation Risks Build Beneath the Surface

The inflation pipeline was already showing signs of stickiness before the latest rise in crude is fully factored in. Unprocessed intermediate goods are up 9.9% YoY, while processed intermediate goods remain elevated at 7.3%, compared with 4.9% for final core goods. That suggests the pressure is not confined to raw materials and strengthens the case for inflation to remain sticky further down the pipeline.

With the US dollar index having already fallen sharply, even a modest upside surprise in PPI or CPI could provide the excuse for a near-term rebound in DXY.

 

US Dollar Index (DXY) Technical Analysis

Now is a good time to remember that futures traders remain heavily long the US dollar, according to the latest Commitment of Traders (COT) data. In aggregate, futures traders on CME were long the USD by $25.4 billion, which is still quite aggressive even if it has roughly halved in recent weeks. Asset managers and large speculators also remain net-long DXY futures by around 33k contracts despite the pullback in the US dollar index. That positioning could help the dollar bounce over the near term should incoming data come in slightly hot.

Longer-Term Dollar Bias Remains Bearish

That said, my longer-term view for the USD remains bearish, based on the assumption that lower highs formed in 2022, early 2025 and June this year. I am therefore seeking evidence of a swing high in the dollar after the anticipated bounce plays out. But if momentum continues lower from here, it simply means my longer-term bearish bias is playing out sooner.

Source: ICE, TradingView

FX Majors Point to Near-Term US Dollar Rebound Risk

Having looked through the FX majors, I can construct a near-term bullish case for the US dollar index from a purely technical perspective. We just need the right catalyst to help it play out. If not, and bearish momentum sees the dollar break lower, I can revert to my core bearish bias.

But for now, my near-term bias is for a pullback in EUR/USD, a bounce in USD/CAD and potentially even USD/JPY.

Source: ICE, TradingView

• A doji formed on the daily DXY chart, which is holding above the August low and a high-volume node (HVN).
• A similar setup is forming on USD/CAD, with Wednesday’s two-bar bullish reversal holding above the May VPOC and August low. A bullish RSI (2) divergence also formed ahead of the August low.
• Meanwhile, EUR/USD appears to be forming a potential rising wedge, which could represent wave ‘b’ of an ABC move lower as bears eye the August VPOC or 1.15 handle.
• USD/JPY has also caught my eye as a potential oversold candidate. It has already fallen around 750 pips in five days, while the past two sessions have produced low-volatility bullish hammers and a potential tweezer bottom. Patience is of course a virtue with this pair, but it should at least serve as a warning to bears who are late to the move.