US Dollar Forecast: Gains Persist While Gold Rises Ahead of CPI Data

U.S. Dollar Strengthens Ahead of Key Inflation Data

The U.S. Dollar Index (DXY) extended its gains for a third consecutive session on Tuesday, climbing 0.4% to 106.64. Traders are positioning cautiously as the dollar remains range-bound between 106.843 resistance and 105.722 support ahead of Wednesday’s pivotal U.S. Consumer Price Index (CPI) report. A breakout above 106.843 could propel the DXY toward its recent high of 108.071, while a breakdown below 105.722 might expose the 50-day moving average at 104.810.

Despite growing expectations of monetary easing, traders are eyeing Wednesday’s inflation data as it could shape the Federal Reserve’s rate policy during its December 17-18 meeting. Market consensus points to an 86% probability of a 25-basis-point (bps) rate cut next week, though analysts such as Macquarie’s Thierry Wizman warn that persistent inflation, low unemployment, and strong financial markets might embolden hawkish Fed members.

Inflation Data in Focus as Treasury Yields Edge Higher

U.S. Treasury yields rose on Tuesday, with the 10-year yield climbing over 3 basis points to 4.234%, as investors awaited CPI data. Expectations are for a 0.3% month-over-month increase in November and a 2.7% year-over-year rise. The release is critical as it will be the last major inflation indicator before the Fed meeting, influencing the central bank’s decision on further rate adjustments.

In addition to CPI, the Producer Price Index (PPI) on Thursday will offer further insights into inflationary trends. While the Fed is in its blackout period, Deutsche Bank analysts emphasized the importance of this data in solidifying the outlook for next week’s policy decision.

Gold Rallies Despite Higher Yields and Firm Dollar

Gold prices reached a two-week high, with spot gold rising 1.1% to $2,687.69 per ounce. U.S. gold futures gained 1% to $2,712.10. The rally was driven by geopolitical tensions and expectations of another Fed rate cut, despite the firm dollar and rising Treasury yields. Analysts suggest that gold remains a key safe-haven asset, benefiting from economic uncertainty and the broader trend toward global monetary easing.

Geopolitical concerns, particularly in the Middle East, and anticipation of accommodative policies from major central banks, including the European Central Bank (ECB) and Bank of Canada (BoC), have underpinned gold’s strength. A softer stance by China, which pledged to adopt an “appropriately loose” monetary policy next year, may also support demand for the metal.

Market Forecast

The DXY’s near-term direction hinges on Wednesday’s CPI data. A stronger-than-expected inflation print may limit the Fed’s room for easing, potentially keeping the dollar elevated. Conversely, a softer reading could reinforce rate-cut expectations, driving the DXY lower and boosting risk-sensitive assets. Gold is likely to remain well-supported, particularly if geopolitical risks persist or central banks signal additional easing measures. Traders should watch for CPI and PPI reports for clarity on inflation and its implications for the dollar and gold.

More Information in our Economic Calendar.