• US Dollar bulls move in and take out a key level of resistance in the DXY index.
• Fed expectations for a pivot are dwindling on the back of inflationary rumbles in the data.

The US Dollar firmed mid-week to a six-week high against a basket of currencies as measured by the DXY index. The index has penetrated a key 103.80 level on the charts amid risks of higher inflation for longer and the markets flipping the script of the Federal Reserve pivot narrative. 

Wednesday'srelease of hotter-than-expected US Retail Sales data was just one of a series of inflationary outcomes from the US calendar in less than a week. Investors are starting to reassess the outlook on the Federal Reserve expecting that they will now have no choice but to keep monetary policy tight for some time to fight stubbornly high inflation, as advocated by hawkish Fed speakers, such as the Fed's John Williams. 

The US data showed that US Retail Sales surged 3.0% last month, increasing by the most in nearly two years. This was a huge beat on economists polled by Reuters that had forecast sales would increase 1.8%, with estimates ranging from 0.5% to 3.0%. The full data arrived as follows:

• US Retail Sales Advance (MoM) Jan: 3.0% (est 2.0%; prev -1.1%).
• US Retail Sales Ex Auto (MoM) Jan: 2.3% (est 0.9%; prev -1.1%).
• US Retail Sales Ex Auto And Gas Jan: 2.6% (est 0.9%; prev -0.7%).
• US Retail Sales Control Group Jan: 1.7% (est 1.0%; prev -0.7%).

The numbers came on the heels of the prior day's inflation data whereby the Consumer Price Index cooled only slightly to 6.4% in January from 6.5% in December, the lowest since October 2021 but above market expectations of 6.2%.

The latest Federal Reserve commentary also underpinned that Federal Reserve policymakers largely backed more rate increases. US interest rates have to rise further to ensure that inflationary pressures recede, t. Louis Federal Reserve's President James Bullard said on Tuesday. 

'We’re almost into a zone that we could call restrictive - we’re not quite there yet,” Bullard said Wednesday in an online Wall Street Journal interview. Officials want to ensure inflation will come down on a steady path to the 2% target. “We don’t want to waver on that,” he said.

“Policy has to stay on the tighter side during 2023” as the disinflationary process unfolds, Bullard added who has pencilled in a forecast for a rate range of 5.25% to 5.5% by the end of this year.

DXY technical analysis

The hourly chart is promising for the bulls but a correction is underway whereby support near a 50% reversion will need to kick in if the US Dollar is going to give off the impressing it is going to stay up for the remainder of the week. If bulls fail to stay involved, then the trendline support could give way as a third dynamic support that has failed since the start of the month.