The US Dollar weakens for the third straight day as traders await the crucial December US CPI data release, which could influence the Federal Reserve's monetary policy decisions.
The US Dollar continues its downward trend for the third consecutive day, weighed down by anticipation surrounding the upcoming US CPI release. The US Dollar Index (DXY), which gauges the strength of the US Dollar against six major currencies, is hovering near 109.00, seeking support ahead of what could be the week's most crucial data point. This week's market focus is laser-sharp on the December US CPI data, scheduled for release on Wednesday.
The previous day's surprise softer-than-expected Producer Price Index (PPI) has shifted expectations toward a potential disinflationary CPI reading and may prompt discussions about revising the timing of the Federal Reserve's (Fed) rate cut cycle in 2025. The upcoming CPI release is generating intense speculation, with estimates for the monthly headline reading ranging from 0.2% to 0.5%, compared to the previous 0.3%. The monthly core reading, considered a more reliable indicator of underlying inflation, is projected to be between 0.2% and 0.3%, down from November's 0.3%. Any deviation from this tight range, especially a reading below 0.2% for the core CPI, could significantly weaken the US Dollar. Conversely, a print above 0.3% for the core CPI is likely to strengthen the USD.Several key economic events are scheduled throughout the day, including presentations by Federal Reserve officials from Chicago, Minneapolis, and New York. These events will likely provide further insights into the Fed's thinking on monetary policy and the economic outlook. In the equities market, trading is currently modestly positive, reflecting cautious optimism ahead of the CPI release. The CME FedWatch Tool indicates a 97.3% probability that the Fed will maintain interest rates at their current levels during the January meeting. However, uncertainty surrounding the inflation trajectory after President-elect Donald Trump takes office on January 20th could influence the Fed's decisions.US Treasury yields are showing a notable softening, with the 10-year benchmark bond trading around 4.761%, down from its recent 14-month high of 4.802% reached on Monday. Technically, the US Dollar Index (DXY) is experiencing volatility, largely due to the lack of clear guidance from Fed officials. Market participants are closely scrutinizing each data point, interpreting them as potential clues about the Fed's policy rate adjustments this year. This data-driven approach naturally leads to fluctuations in the DXY as traders react to every new piece of information. On the upside, the DXY faces resistance at the psychological 110.00 level, with further upside targets at 110.79 and 113.91. On the downside, the DXY is testing support at the ascending trend line originating from December 2023, currently situated around 108.95. More significant support levels lie at 107.35, 106.52, and the 55-day Simple Moving Average (SMA) at 107.01
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