15 Jan 2025

US Dollar (USD) slipped overnight after PPI missed estimates (+0.2% m/m vs. 0.4% expected), OCBC's FX analyst Christopher Wong notes.

Bearish divergence appears on RSI

A previous report indicated that the Trump administration is contemplating a plan for incremental tariff increases ranging from approximately 2% to 5% per month. This potential strategy has contributed to positive market sentiments, as investors often respond favorably to the prospect of structured economic policies that could stabilize trade relations. The anticipation of these tariff adjustments has led to a noticeable rebound in most non-USD foreign exchange currencies, reflecting a shift in investor confidence and a potential weakening of the U.S. dollar.

In contrast, the Dollar Index (DXY), which measures the value of the U.S. dollar against a basket of foreign currencies, showed a slight decline during this period. The DXY was last recorded at 109.25, indicating a decrease in the dollar's strength relative to other currencies. However, it remains uncertain whether this recent trend of dollar depreciation will continue in the face of evolving economic conditions and market reactions to the proposed tariff increases.

It is important to note that the proposal for gradual tariff increases is still in its preliminary phases, meaning that no definitive decisions have been made, and the specifics of the plan are still being discussed. As such, market participants are likely to remain cautious, closely monitoring developments and any official announcements from the administration. The potential for these incremental tariffs to impact trade dynamics and economic growth will be a key factor influencing market behavior in the coming months. Investors will be watching for further clarity on the administration's intentions and the broader implications for both domestic and international markets.

The daily chart analysis reveals a consistent and mild bullish momentum in the market, suggesting that prices have been gradually trending upwards. However, it's important to note that the Relative Strength Index (RSI), a key momentum indicator, has exhibited a slight decline. This divergence between price action and the RSI indicates that while the market is still showing bullish characteristics, there may be underlying weakness that could lead to a potential reversal or pullback in the near term.

Despite the current bullish trend, the possibility of a short-term retracement cannot be overlooked. The presence of a bearish divergence on the RSI signals that the upward momentum may be losing steam, and traders should remain vigilant for any signs of a price correction. As we continue to monitor price movements, further validation of this divergence will be crucial in determining the next steps for market participants.

In terms of technical levels, key support has been identified at 108.50, which aligns with the 21-day moving average, and at 107.15, corresponding to the 50-day moving average. These levels are critical as they may provide a cushion for prices in the event of a pullback. On the upside, resistance levels are established at 110.10 and 110.90. A breach of these resistance levels could signal a continuation of the bullish trend, while failure to break through may reinforce the potential for a retracement.

Today, all eyes are on the Consumer Price Index (CPI) report, which is a significant economic indicator that measures inflation. A notably lower CPI reading could have a dampening effect on the strength of the dollar, potentially leading to a decrease in its value as market participants adjust their expectations regarding future monetary policy. On the other hand, if the CPI report comes in strong, it could further bolster the USD, reinforcing the current bullish sentiment and possibly pushing prices towards the identified resistance levels. As such, the outcome of the CPI report will be pivotal in shaping market dynamics in the near term.