Weaker-than-expected figures would hurt the currency further and could trigger a deeper retreat

The US dollar struggles for direction on Tuesday after the recent slide from the 106.00 figure that capped recovery last week. Earlier in the month, the buck briefly derailed the 105.00 mark before bouncing as dip buyers reemerged around late-September lows.

After the subsequent retreat, the USD index has settled slightly above the 105.50 zone, with traders awaiting US CPI data that will set fresh direction for the greenback. Inflation is expected to have grown 3.3% year over year and 0.1% on a monthly basis.

Weaker-than-expected figures would hurt the currency further and could trigger a retreat below the 105.40 immediate support. On the upside, a decisive break above 106.00 would improve the near-term technical picture surrounding the US dollar.

Earlier, sentiment among investors was hurt by Moody’s decision to downgrade the US’ economic outlook over the weekend, citing the downside risks to the fiscal strength that have increased. The agency also expects the US’ fiscal deficits to remain very large. At the same time, Moody’s affirmed its long-term issuer and senior unsecured ratings at Aaa. Despite the news, US stocks were little changed at the start of the week to show a fairly muted reaction to Moody’s decision.

Apart from US CPI data, that could affect Fed rates expectations, market focus now shifts to U.S.-China summit. Tomorrow, Chinese leader Xi Jinping is set to meet with President Joe Biden on the sidelines of a Pacific Rim summit in California. Positive comments from the meeting could fuel risk demand and thus pressure the greenback later in the week.

In the immediate term, the buck needs to hold above 105.50 in order to stay afloat and resume the ascent eventually. Otherwise, the 105.00 mark will come back into the market focus. In a wider picture, the uptrend that persists since August remains in place so far.  


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