US Dollar Bounces From Three-Year Lows; Is The Pain Trade Over?

US DOLLAR CRUSHED AFTER STRONG INFLATIONARY READ

It was a big week for the US Dollar. As we opened trading on Monday morning, the Greenback was holding on to last week’s gains, finding a bit of support above the 90.00 level on DXY. Given that this strength was showing after what’s been an impressive year of losses made that observation all the more interesting, as it could’ve been leading to a longer-term move of USD strength that might last for a couple of weeks or perhaps even a few months. This was similar to what was seen last September, when an enhanced bout of selling in June and July finally ran into an area of support that brought two months of gains to the Greenback. Of course, that weakness came back in December and really hastened throughout January, bringing a slight change-of-pace in February as the Dollar started to show a bit of strength.

US DOLLAR VIA ‘DXY’: FEBRUARY STRENGTH ERASED, NOW BOUNCING FROM FRESH THREE-YEAR LOWS

Chart prepared by James Stanley

BUY THE NEWS – SELL THE REACTION

The US Inflation report on the calendar for Wednesday morning was the object of focus, as recent market dynamics have appeared to indicate a sensitivity to inflationary pressure in the US. The jump in Average Hourly Earnings in the Non-Farm Payrolls report earlier in February appeared to really drive the risk aversion throughout global markets, and with another key piece of inflation data on the docket, markets were looking for clues as to just how strong inflationary pressures are showing in the US economy.

This number came out at 2.1% versus the expectation of 1.9%, marking the fifth consecutive month of CPI-growth that’s at-or-above the Fed’s target of 2%. Normally, a read of this nature would bring strength to a currency on the basis that higher inflation means a stronger probability of higher rates, leading to flows into the currency to capture those new, higher rates. And for a few minutes on Wednesday morning – this happened; but it didn’t last for long, and sellers came back with a vengeance after DXY posed a quick re-test of that 90.00 level. Bears have remained in-control for most of the time since, leading to a fresh three-year low set in the overnight session.