U.S. Dollar Index (DX) Futures Technical Analysis – CPI Needs to Beat Forecast to Extend Rally

The U.S. Dollar is edging lower against a basket of major currencies on Tuesday as investors squared positions ahead of today’s U.S. consumer inflation report, due to be released at 13:30 GMT. The data is expected to have a major influence on Fed policy and its next two interest rate decisions.

At 08:14 GMT, March U.S. Dollar Index futures are trading 103.075, down 0.173 or -0.17%. On Monday, the Invesco DB US Dollar Index Bullish Fund ETF (UUP) settled at $27.90, down $0.08 or -0.29%.

CPI Report On Tap

Investors are expecting that the headline Consumer Price Index (CPI) will show a 0.4% increase in January, which would translate into 6.2% annual growth, according to Dow Jones. Excluding food and energy, so-called core CPI is projected to rise 0.3% and 5.5%, respectively.

However, there’s some indication the number could be even higher.

The Cleveland Fed’s “Now cast” tracker of CPI components is pointing toward inflation growth of 0.65% on a monthly basis and 6.5% year over year. On the core, the outlook is for 0.46% and 5.6%.

What the CPI Report Will Mean to the US Dollar

Ahead of the CPI report, the market believes the Fed seems intent on raising rates another 50 basis points. That would take the current target range of 4.5%-4.75% to 5.0%-5.25%. Market pricing also indicates that the Fed will stop at a “terminal rate” of 5.18%.

A much stronger than expected report will give the Fed more evidence to lift rates higher and for longer. This would be bullish for the dollar. Meeting or coming in under the forecast is not likely to change the Fed’s mind about implementing a pair of 25 basis point rate hikes in March and June.

Daily March US Dollar Index Technical Analysis

The main trend is up according to the daily swing chart. A trade through 103.850 will signal a resumption of the uptrend. A move through 100.680 will change the main trend to down.

The minor trend is also up. A trade through 102.520 will change the minor trend to down. This will also shift momentum to the downside.

The main range is 105.500 to 100.680. The index is currently testing its 50% level at 103.090.

The nearest resistance is the long-term Fibonacci level at 103.664. The closest support is the short-term 50% level at 102.265.

Daily March US Dollar Index Technical Forecast

Trader reaction to the 50% level at 103.090 is likely to determine the direction of the March US Dollar Index on Tuesday.

Bullish Scenario

A sustained move over 103.090 will indicate the presence of buyers. This could trigger a surge into the long-term Fibonacci level at 103.664. Taking out the pair of minor tops at 103.745 and 103.850 could trigger an acceleration to the upside with the resistance cluster at 105.500 – 105.723 the next major upside target.

Bearish Scenario

A sustained move under 103.090 will signal the presence of sellers. The first downside target is the minor bottom at 102.520, followed by a short-term 50% level at 102.265. The latter is a potential trigger point for an acceleration into 101.000.