US Dollar posts modest gains while traders commemorate MLK holiday, markets digest US inflation

• The DXY Index trades mildly higher at around 102.60.
• Markets will remain quiet on Monday as US traders are on the sidelines celebrating MLK’s holiday.
• Investors digest last week’s inflation data from the US from December.

The US Dollar (USD) is enjoying slight gains with the DXY Index trading at 102.60, while US traders celebrate Martin Luther King Jr.’s holiday. No relevant highlights are expected in the session, and markets are still digesting last week’s US inflation readings from December.

The Fed's dovish stance, based on welcoming the cooling inflation and projecting no rate hikes in 2024, has recently weakened the USD and seems to be offsetting the resilience of the US economy while other economic blocks are weakening. Despite higher CPI numbers, the market remains stubborn and expects the Fed to initiate its easing cycle sooner rather than later, and the soft PPI readings gave markets a reason to bet on a less aggressive approach.

Daily digest market movers: US Dollar registers mild gains after CPI releases

• Last week, the US Bureau of Labor Statistics revealed that the Consumer Price Index (CPI) escalated to 3.4% YoY in December, surpassing November's 3.1% and the predicted 3.2% consensus figure.
• The core CPI dropped to 3.9%, lower than November’s 4%, but higher than the expected 3.8%.
• US Producer Price Index (PPI) for final demand rose by 1% on a yearly basis in December, slightly below market expectations of 1.3% and up from the revised 0.8% increase in November.
• The annual core PPI, which excludes volatile food and energy prices, increased by 1.8% in December, falling below both the November reading and analysts' estimates of 2% and 1.9%, respectively. The monthly core PPI remained unchanged for the third consecutive month.
• As for now, The CME FedWatch Tool shows that the odds of rate cuts in March and May remain elevated at 70% and 66%, respectively.
• This week the US will release Retail Sales figures from December and the Fed’s Beige Book, which may have an impact on those expectations.

Technical Analysis: DXY gets some traction, outlook is not yet bullish

From a technical analysis standpoint, the daily chart reflects that the index gained some traction. The positive slope in the Relative Strength Index (RSI) within positive territory suggests an increase in buying pressure. This optimistic aspect is echoed by the Moving Average Convergence Divergence (MACD) with its flat green bars pointing to a stabilization in bullish sentiment. 

However, the index remains above the 20-day Simple Moving Average (SMA) but below the 100 and 200-day SMAs. This underpins a sense of bearish dominance in the broader trend, but bears need to raise their game to regain short-term control as the bulls have managed to keep the pair above the shorter-term SMA. Therefore, in the short-term technical outlook, it appears the bullish momentum has an upper hand despite bearish undertones due to the position on longer-term SMAs.

Support levels: 102.30, 102.00 (20-day SMA), 101.80.
Resistance levels: 102.70, 102.80, 103.00.