US Dollar at crossroad for either substantial break lower or fresh highs on the back of CPI relase

By News Room Last updated Jan 15, 2025

The US Dollar ekes out more losses for this week.
All eyes shift to the US CPI release due to be released this Wednesday.
The US Dollar Index (DXY) tests 109.00 and might tank further on a possible disinflationary CPI release.

The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, is testing more downside by trading around 109.00 in search of support ahead of potentially the most important data release for this week. It will be a very data-dependent day as all eyes are on the upcoming United States (US) Consumer Price Index (CPI) data for December on Wednesday after markets were caught by a surprise softer-than-expected Producer Price Index (PPI) the previous day. Because of that, expectations have swung now to the assumption the upcoming CPI numbers will be disinflationary and might see a revision of the timing when the Federal Reserve (Fed) will continue its rate cut cycle in 2025.

Thus, the US economic calendar will orbit around one thing: the US CPI for December. A look under the hood reveals estimates for the monthly headline reading ranging from 0.2% to 0.5% compared to the previous 0.3%. The monthly core reading has very tight estimates ranging between 0.2% and 0.3% compared to the 0.3% seen in November.

Given the tight expectation range for the core CPI reading, a number outside the range could be the most market-moving element. Any print below 0.2% will trigger substantial weakness in the US Dollar (USD), whereas a print above 0.3% will strengthen the USD.

Daily digest market movers: CPI becomes as important as a Fed meeting

At 13:30 GMT, the US Consumer Price Index data for December will be released.
- The monthly core CPI measure is expected to rise 0.2% compared to 0.3% the previous month. The monthly headline CPI reading is expected to increase steadily by 0.3%.
- The yearly core CPI reading should rise steadily by 3.3%, while the headline reading is expected to tick up 2.9% compared to 2.7% in November.
At 14:00 GMT, Federal Reserve Bank of Chicago President Austan Goolsbee will discuss the economy at the Wisconsin Bankers Association 2025 Midwest Economic Forecast Forum.
At 15:00 GMT, Minneapolis Fed President Neel Kashkari will give welcoming remarks and participate in a fireside chat with Jay Debertin, President and CEO of CHS, Inc., as part of the Minneapolis Fed’s 2025 Regional Economic Conditions Conference.
At 16:00 GMT, Federal Reserve Bank of New York President John Williams delivers keynote remarks at the “CBIA Economic Summit and Outlook 2025” event organized by the Connecticut Business and Industry Association (CBIA) in Connecticut.
Equities are marginally in the green on Wednesday, with traders awaiting the US CPI release.
The CME FedWatch Tool projects a 97.3% chance that interest rates will be kept unchanged at current levels in the January meeting. Expectations are for the Federal Reserve (Fed) to remain data-dependent with uncertainties that could influence the inflation path once President-elect Donald Trump takes office on January 20.
US yields are softening substantially. The 10-year benchmark trades around 4.757% at the time of writing on Wednesday, fading from its fresh 14-month high of 4.802% seen on Monday.

US Dollar Index Technical Analysis: Wild rides from here on out

The US Dollar Index (DXY) has become volatile, and it has the Federal Reserve to thank. With little to no real guidance from Fed officials, markets need to treat each data point as an assessment of where they think the Fed will initiate its policy rate move this year. Jumping from one data point to the next, it is quite normal for the DXY to also jump around the chart and see a volatility peak.

On the upside, the 110.00 psychological level remains the key resistance to beat. Further up, the next big upside level to hit before advancing any further remains at 110.79. Once beyond there, it is quite a stretch to 113.91, the double top from October 2022.

On the downside, the DXY is testing the ascending trend line from December 2023, which currently comes in around 108.95 as nearby support. In case of more downside, the next support is 107.35. Further down, the next level that might halt any selling pressure is 106.52, with interim support at the 55-day Simple Moving Average (SMA) at 107.01.

US Dollar Index: Daily Chart

Inflation FAQs

Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.

The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.

Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.

Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.

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