USD Weekly Outlook: Dollar Index (DXY) Eyes U.S. CPI

U.S. DOLLAR ANALYSIS & TALKING POINTS

• Short-term forward guidance rests on U.S. CPI data.
• Uncertainty shown by technical factors on DXY daily chart.

USD FUNDAMENTAL FORECAST: MIXED

The Dollar Index (DXY) ended the last week on the backfoot after some key U.S. economic data including Non-Farm Payrolls (NFP) and ISM services, as well as higher than expected core inflation for the eurozone despite falling energy prices (the euro makes up 57.6% of the DXY) . A key statistic within the NFP data was that wage pressures are easing which have been a concern in the U.S. services sector giving support to high inflation figures. It will be interesting to see whether or not softening average hourly earnings for December translate through to next week’s U.S. CPI release.

The CPI print will be the focus for the greenback and considering both core and headline inflation figures have been on the decline since late to mid-2022 respectively, another softer figure could dampen bullish support.

ECONOMIC CALENDAR

Source: DailyFX economic calendar

A CPI beat would bring into consideration a 50bps interest rate hike in the February Federal Reserve (refer to table below for current money market pricing) meeting while a miss could cement a 25bps increment leaving the DXY vulnerable to a leg lower. The trading week will end off with the Michigan consumer sentiment report for January and is expected to inch higher exhibiting optimism by U.S. consumers.

FEDERAL RESERVE INTEREST RATE PROBABILITIES

Source: Refinitiv

TECHNICAL ANALYSIS

U.S. DOLLAR INDEX DAILY CHART

Chart prepared by Warren Venketas, IG

Daily DXY price action did not follow through to the upside after the recent falling wedge (black) breakout failing to hold above the 105.00 psychological resistance handle. The general trend remains bearish with the Relative Strength Index (RSI) trading below the midpoint 50 level and below the 200-day SMA (blue). Next week’s CPI will likely provide some directional bias moving forward which should keep the DXY rangebound until then.

Resistance levels:

• 105.00
• 104.65
• 104.11

Support levels:

• 103.42
• 102.15

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