Dollar forecast: NFP and hot inflation expectations trigger DXY rebound - Forex Friday

The US dollar remained on the front-foot after the UoM Inflation Expectations survey revealed the percentage of surveyed consumers that expect the price of goods and services to change during the next 12 months jumping to 4.3% from 3.3% the month before. This is a worrying sign since expectations of future inflation can manifest into real inflation, mainly because employees are more likely to demand higher wages when they expect prices to increase. This comes hot on the heels of the January payrolls data released earlier, which revealed that wages grow by a surprisingly strong 0.5% month-over-month. The market was repricing US interest rates lower in recent days, but the strong wages growth and hot inflation expectations, as well as ongoing expectations of inflationary policies under Donald Trump, means the Fed is likely to remain on pause for a long time. Yields have pushed higher again; indices and gold have turned lower, and the dollar has risen across the board. US CPI, Powell’s testimony, and company earnings will be in focus next week. Ahead of these releases, the US dollar forecast remains bullish.

Dollar forecast: Strong wages and inflation expectations raises inflation alarm bells

Today’s economic data has likely ruled out a rate cut in the Fed’s next few meetings, which looked unlikely to start with anyway. Despite a slightly weaker headline payrolls figure, the broader picture remains one of labour market resilience and persistent wage pressures—leaving the Fed with little urgency to ease policy. Indeed, the UoM survey that was released earlier was even more eye-catching. Moreover, with the Trump administration’s policies poised to influence both employment and inflation, holding rates steady seems the most prudent course for now. Against this backdrop, the US dollar forecast remains positive, especially against currencies where the threat of tariffs is still there.

While the Prelim UoM Consumer Sentiment was weaker at 67.8 compared to 71.9 expected, this was entirely overshadowed by the Inflation Expectations survey. The latter jumped to 4.3% from 3.3% in January, suggesting that consumers are expecting inflation to rebound under Trump’s presidency.

Earlier, the monthly non-farm jobs report came in mixed-to-positive, which also helped to provide support for the dollar. In particular, it was the average earnings part of the report that caused raised eyebrows. It came in much stronger, rising 0.5% on a month-over-month basis, or 4.1% year-over-year, up from 3.9%. The strong wages growth point to inflationary pressures, suggesting no immanent rate cuts should be expected, despite Trump calling for lower borrowing costs.

The headline jobs figure itself missed expectations at 143K, but this was countered by revisions adding a total of +100K jobs to prior two months. Meanwhile, the unemployment rate ticked lower to 4.0% from 4.1% previously.

Looking ahead to next week: Powell, CPI and retail sales

Powell testimony

Tuesday, February 11

15:00 GMT

Following Trump’s call for lower US interest rates, the Fed Chair will probably try and defend the central bank’s independency and shrug off those calls, especially in light of the strong wage growth and inflation expectations we saw on Friday and ahead of US inflation data to come in the following couple of days. Still, any indications that the Fed may cut rates sooner than expected could cause a drop in US dollar and bond yields. His day two of testimony is on Wednesday.

US CPI

Wednesday, February 12

13:30 GMT

Traders may wish to pay close attention to incoming US data, with CPI on top for Wednesday. If we see renewed strength in inflation data then that will once again push back expectations of a Fed cut, putting upward pressure on the US dollar and bond yields. Don’t forget to watch PPI inflation data that will come out a day later, on Thursday, at the same time.

US Retail Sales

Friday, February 14

13:30 GMT

Retail sales have remained solid despite concerns about high interest rates or inflation eroding the purchasing power of the US consumer. That said, the December data, released last month, was a bit weaker, with headline sales rising just 0.4% m/m compared to 0.6% expected, while core sales also missed the mark with a similar print. Was that just a one off, or will see a new trend? It is also worth keeping an eye on the release of earnings from tech giants and retailers to get a better picture of the health of the US consumer.

Technical dollar forecast: Dollar Index (DXY) rises to test key resistance

Source: TradingView.com

On the Dollar Index chart, key support lies between 107.08 and 107.35, while resistance is positioned in the 108.00–108.34 range. A breakout beyond either level is likely to drive further momentum in that direction. At the time of writing, the DXY was testing the upper end of this resistance zone, potentially on the verge of providing a fresh bull signal for the dollar bulls.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R

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