US Dollar Price Analysis: DXY fate lies in US CPI

The US Dollar is sitting in a technical bundle of key structures that has something for both the bulls and bears ahead of the release of US inflation data and the final Federal Reserve meeting of the year.

Traders are looking for signs of a Fed pivot, i.e., for its policy outlook to change course from its currently contractionary (tight) monetary policy to expansionary (loose).

A Fed pivot typically happens when economic conditions have fundamentally changed in such a way that the Fed can no longer continue its prior policy stance and the US Consumer Price Inflation data is used as a primary gauge in that respect. In fact, the DXY's biggest daily drop and second-largest daily gain in 2022 have come on the back of prior CPI data.

The Fed is widely expected to hike the funds rate by 50 basis points (bp) on Wednesday, after four consecutive 75 bp hikes. If the data comes in hotter than expected, this will be problematic for the Fed eager to slow the pace of tightening and potentially weigh on risk assets and thus lead to a stronger US Dollar. 

The headline is expected at 7.3% YoY vs. 7.7% in October, while the core is expected at 6.1% YoY vs. 6.3% in October.  Last week, the Producer Price Index came in higher than expected, raising concerns that inflation is likely to prove to be much stickier than the markets are pricing.

DXY technical analysis

The trendline was broken and the bulls are on the back side of it. If the data comes in hot, a move beyond the 50% mean reversion resistance near 1.05.65 could spell an upside correction continuation scenario for the near future.  On the flip side, 103.00 will be a key target for the remaining weeks of the year should a Fed pivot be priced in even further.