Dollar index (DXY) forecast ahead of US inflation report

The US dollar index (DXY) price remained in a tight range on Thursday morning as traders waited for the upcoming US consumer inflation data. The index, which tracks the greenback against a basket of currencies, was trading at $102.24, where it has been stuck at in the past few days. This price is a few points above the year-to-date low of $100.

US inflation data ahead

The US will publish the most important economic data of the month on Thursday. In a report, the Bureau of Labor Statistics (BLS) will publish the most recent consumer inflation data. This is an important report because it is part of Federal Reserve’s dual mandate.

Economists believe that US inflation had no major moves in December. Precisely, they expect that the headline Consumer Price Index (CPI) rose from 0.1% to 0.2% in December. This, in turn, translated to a YoY increase of 3.2%. Core inflation is expected to drift downwards to 3.8%, the lowest level in two years.

There are positive signs that America’s inflation is retreating. For example, the average gasoline price has dropped to $3.078 from $3.27 a year ago. This retreat will likely continue now that the price of crude oil has been in a downward trend.

However, there are two main challenges on inflation. First, the ongoing Houthi attacks in the Middle East has led to higher shipping costs. Therefore, there is a likelihood that these logistics challenges will lead to higher prices in the coming months.

The other inflation challenge is in the services sector. As wages rise, many service providers have pushed prices higher. This includes simple services like Netflix, HBO, and Paramount+. 

US labor market strong

These US inflation numbers will come a week after the US published the latest non-farm payrolls (NFP) data. According to the BLS, the economy added over 200k jobs in December while the unemployment rate remained at 3.2%. Wages continued rising.

These numbers implied that the US economy was still tightening, which is a good thing. The challenge is that these jobs numbers could make it difficult for the Fed to start easing rates as soon as in March. 

Federal Reserve speakers have pushed back about rate cuts happening in the near term. In a statement on Wednesday, John Williams, the head of New York Fed said that the Fed needed to do more to bring inflation to target. He said:

Therefore, stronger-than-expected inflation figures will likely mean that the Fed will not lower interest rates in March.

Implication for the US dollar index

DXY chart by TradingView

The US dollar index will likely remain on edge after the US publishes the latest inflation numbers. Technically speaking, the outlook for the index is mildly bearish, as traders target last week’s low of $100.78. A break below that price will see it move to the next support level at $99.62, the lowest point in July last year.