US Dollar Forecast: DXY Gains as CPI Data Reinforces Fed Pause Expectations

Dollar Firms as CPI Data Reinforces Fed Pause Expectations

The U.S. Dollar is edging higher against a basket of major currencies on Tuesday after an increase in U.S. consumer prices in December solidified expectations the Federal Reserve would leave interest rates unchanged at the end of this month. Reuters is saying that the distortions related to the government shutdown that had artificially lowered inflation in November unwound, revealing the true status of inflation.

At 16:20 GMT, DXY is trading 99.218, up 0.324 or +0.33%.

December CPI Rises 0.3%—Matches Economist Forecasts

The CPI rose 0.3% last month, the Labor Department’s Bureau of Labor Statistics (BLS) said on Tuesday. In the 12 months through December, the CPI advanced 2.7%, matching November’s gain. Economists polled by Reuters had forecast the CPI picking up 0.3%. The BLS estimated the CPI rose 0.2% from September to November.

Inflation Data Caps Dollar Rally—Rate Cut Hopes Remain Alive

Essentially, the CPI data is temporarily supportive for the dollar because it didn’t give the Fed what it needs to cut interest rates later this month. However, it does give the Fed more room to cut rates later, which would cap rallies in the greenback throughout the year and could even threaten last year’s low if the central bank is aggressive.

Safe-Haven Demand Emerges Amid Iran Tensions

Treasury yields are steady to lower, which could be stopping the dollar from breaking out to the upside today, but the greenback is still firm, which suggests something else may be in the works like safe-haven buying tied to the escalating geopolitical events in Iran. This may be putting a bid under the market.

Dollar Recovers from Trump-Powell Investigation Selloff

Traders should also note that the index has recaptured yesterday’s losses tied to the turmoil created by President Trump and Fed Chairman Powell. On Monday, the U.S. Justice Department opened an investigation into Powell, which traders interpreted as an attempt to influence the Fed to lower interest rates.

Technical Analysis: Dollar Index Tests Key Retracement Zone

Technically, the trend is up according to the swing chart, but this trend indicator is getting added support with the dollar index trading on the strong side of the 200-day moving average at 98.810 and the 50-day moving average at 99.058.

Perhaps standing in the way of a bullish breakout is the retracement zone at 99.072 to 99.384. Currently, the index is straddling this zone. We could see some intraday weakness on a sustained move under the lower level at 99.072. On the flip side, the upper level of 99.384 is a potential trigger point for an acceleration to the upside.

Market Outlook: Bullish Bias Intact Above 200-Day Moving Average

Looking ahead, the upside bias should continue as long as the index stays above the 200-day moving average at 98.810. If upside momentum continues to build over the 50% level at 99.072, buyers may take a run at 99.384. Taking out this level with strong conviction could launch a breakout with 100.395 as a major objective.

More Information in our Economic Calendar.