US Dollar soft ahead of CPI

DXY trades with mild losses on Monday, hovering near the 105.85 level.
Markets await November CPI data, which is expected to show slightly accelerating inflation.
Fed’s December rate cut is widely anticipated but seen as hawkish.

The US Dollar Index (DXY) began Monday’s session with mild losses, maintaining its position near the 105.80 level. Market participants are turning their attention to November’s Consumer Price Index (CPI) data, due Wednesday, which is expected to show annual headline inflation accelerating to 2.7% from 2.6%.

Despite expectations of a December rate cut by the Federal Reserve (Fed), markets remain focused on the central bank’s cautious stance amid sticky inflation concerns.

Daily digest market movers: DXY steadies ahead of CPI and Fed decision

DXY trades near 106.00 as markets prepare for key data releases this week.November Consumer Price Index (CPI) is forecast to rise by 2.7% annually, up from 2.6% in October, while core CPI is expected to remain steady at 3.3%.
The Fed’s media blackout leaves no new commentary, but markets price in an 85% chance of a December rate cut.
The Atlanta Fed GDPNow model projects Q4 growth at 3.3% SAAR, while the New York Fed’s Nowcast shows 1.9% for Q4 and 2.4% for Q1.
Last week’s jobs data showed strong results with November’s Nonfarm Payrolls at 227K, well above expectations of 200K.Consumer Sentiment for December rose to 74, while inflation expectations eased slightly with the 5-year outlook falling to 3.1%.

DXY technical outlook: Bulls cautiously hold 106.00 level amid mixed signals

The DXY continues to hover near 106.00, showing mild strength despite ongoing concerns about sticky inflation and a dovish-leaning Fed. Key technical indicators remain mixed. The Relative Strength Index (RSI) is declining, approaching its neutral 50 level, suggesting waning bullish momentum.

Meanwhile, the Moving Average Convergence Divergence (MACD) indicator shows red histogram bars, signaling bearish pressure as short-term moving averages lag behind longer-term ones.

Immediate resistance is seen at 106.50, with further hurdles near 107.00. On the downside, support is firm between 105.50 and 106.00. Wednesday’s CPI data will likely be the key driver for the index’s next significant move, with a surprise potentially triggering volatility across the board.

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.

Source: https://www.fxstreet.com/news/us-dollar-holds-ground-ahead-of-key-inflation-data-202412091819