Worse than expected US Manufacturing Production and Industrial Production top off a rough data week

US Manufacturing Production for May was -0.1% MoM vs +0.3% MoM expected and a reading of +0.8% MoM in April. In addition, Industrial Production for May was +0.2% MoM vs an expectation of +0.4% and an April reading of +1.4% MoM. This US economic data ends a week in which all the major economic releases were worse than expected, while the FOMC hiked rates by 75bps! Recall that on Tuesday, retail sales were -0.3% MoM vs +0.2% MoM expected, while the NY State Manufacturing Index for June was -1.2 vs an expectation of 3. Then on Thursday, the Philadelphia Fed Manufacturing index for June was -3.3 vs an expectation of 5.5. Housing Starts and Building Permits for May, also released Thursday, were weaker than expected as well. Despite the bad economic data this week, last Friday’s higher than expected inflation data seems to be what put the Fed over the top, causing them to hike 75bps this week. Stronger inflation and weaker manufacturing and housing data. Is the US headed for a recession?

Looking at the DXY on a longer-term monthly timeframe shows that the US Dollar Index traded this to its highest level since November 2002, as more interest rate hikes are expected. First resistance on the monthly timeframe is at the 127.2% Fibonacci extension from the highs of March 2020 to the lows of January 2021, near 106.72. The next level of horizontal resistance, dating to the highs of December 2002, crosses at 107.31. Above there is a confluence of resistance from horizontal resistance dating to September 2001 and the 161.8% Fibonacci extension from the recently mentioned timeframe, near 111.31/111.49. However, notice the RSI on the monthly timeframe is in overbought territory, meaning traders should be on the lookout for the possibility of a pullback. First support is at the May lows of 101.30. Below there, price can fall to horizontal support at 97.44 and the 93.43, before falling to the March 2020 lows at 89.21.

Source: Tradingview, Stone X

The Euro makes up 57% of the DXY. Therefore, the DXY and EUR/USD trade in opposite directions. The panel at the bottom of the chart below shows the correlation coefficient between the DXY and EUR/USD on the monthly timeframe. Notice that the reading is -0.99. A reading of -1.00 is a perfect negative correlation, meaning the 2 assets trade in opposite directions 100% of the time. -0.99 is pretty close. If EUR/USD continues to move lower, the next support level is the lows from March 2020 at 1.0340. Below there, price can fall to the 127.2% Fibonacci extension from the lows of March 2020 to the highs from January 2021 at 1.0170. If price breaks though there, the next level of support is the psychological round number resistance level at 1.0000. If support holds on the longer timeframe, first resistance is at the lows from March 2020 at 1.0636. Above there, horizontal resistance crosses at 1.0787, then additional horizontal resistance at 1.1186.

Source: Tradingview, Stone X

Manufacturing Production and Industrial Production topped off a week of ugly data for the US. Sandwiched in the middle of the week was a 75bps increase in the fed funds rate by the FOMC. However, despite the bad data, Fed Chairman Powell said he does not see a spillover from the high inflation into the broader economy. Therefore, the Fed excepts to continue hiking rates. As a result, the DXY is higher on the month and the EUR/USD is lower. The next direction in the DXY will depend on how much longer the Fed will be expected to raise rates!

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