US Dollar Index News: DXY Gains Momentum as CPI Soars

Key Points

1. Dollar surges on unexpected CPI jump.
2. Investors reevaluate Fed rate cut expectations.
3. Short-term bullish outlook for the U.S. Dollar Index.

Dollar Soars on CPI Surge, Short-Term Bullish Outlook

The dollar surged against the euro and yen as December’s Consumer Price Index (CPI) delivered an unexpected jolt. The headline CPI notched a 0.3% increase last month, driving an annual gain of 3.4%, surpassing forecasts of 0.2% and 3.2%, respectively. The dollar index climbed 0.05% to 102.39, up from its pre-data level around 102.20.

Market Reaction

In the aftermath, the euro saw a 0.04% dip to $1.09650, while the greenback gained 0.02% against the yen, settling at 145.80. Traders quickly recalibrated their bets, reducing expectations of a Federal Reserve rate cut in March. Before the data, futures contracts indicated a 70% probability of a March rate cut, now diminished to about 60%. Markets now foresee the policy rate, currently 5.25%-5.5%, ending the year near 3.92%, compared to previous estimates of 3.88%.

Treasury Yields

Supporting the dollar’s ascent, Treasury yields saw an upswing. The 10-year U.S. Treasury yield climbed past 4.06%, reflecting the hotter-than-expected inflation reading and pushing rate cut expectations further into the future. The 10-year yield had been hovering near 4% for most of the week. Meanwhile, the 2-year Treasury yield rose by over one basis point to 4.383%.

Inflation Details

December’s CPI report brought the heat, with a 0.3% monthly increase and a 3.4% rise over the year, exceeding expectations of 0.2% and 3.2%. However, core inflation, which excludes volatile food and energy prices, stayed in line with forecasts, registering a 0.3% monthly increase and a 3.9% annual gain, compared to estimates of 0.3% and 3.8%, respectively.

Short-Term Bullish Outlook

As CPI defies expectations, the U.S. Dollar Index is poised for a short-term bullish run. Investors may need to brace for increased volatility. The Fed could maintain or even intensify its monetary policy stance in response to mounting inflationary pressures. Friday’s release of the December producer price index, tracking wholesale-level inflation, will provide further insight into economic conditions.

Technical Analysis

The U.S. Dollar Index is currently trading at 102.412, slightly above the previous daily close of 102.359. However, it’s important to note that the asset is trading below both its 200-day moving average of 103.422 and its 50-day moving average of 103.230.

The market appears to be consolidating. Minor support and resistance levels are at 101.950 and 102.853, respectively, while the main support and resistance levels are 101.000 and 103.572.

Currently, the market sentiment is neutral, reflecting the consolidation phase. However, an upside breakout could potentially lead to a test of the moving averages.