In terms of the direction of the DXY also check out our article earlier this week...

"Inflation has topped out, and will probably fall towards 4% next year. However, returning it to 2% will require a markedly weaker labor market. To bring this about, we believe it will take much tighter financial conditions for a prolonged period." (Nordea)

The last CPI data showed a soft-core CPI print which saw Treasury yields and the dollar lower and a second consecutive low reading would support the market view that rate cuts are going to be on the agenda for the second half of 2023 but the market has already decided rates are going lower.

We don’t think a weaker CPI number will hurt the USD unless it's a huge miss...

“If CPI comes in north of expectations or even doesn’t decline at all, that is not going to be market-positive," (Tom Hakins Bank Wealth Management.) the market is already firmly of the view its topped out but on the charts later in this article, we can see inflationary pressure will take time to move to levels that the Fed will feel comfortable with.

“Overall inflation is moving in the right direction, though at a slow pace. The Federal Reserve’s tightening plans will remain aggressive until clear, consistent signs of inflation’s demise have been demonstrated.” (Kurt Rankin, senior economist at PNC.)

Inflation is far from beaten Goods inflation has been falling all year, and housing services look set to stay high on past increases in rental prices, but overall inflation is not under control until service prices moderate.

House rental price growth have slowed down, but the impact of past increases will keep the housing component in CPI and PCE higher as we move forward which we can see on the chart below.

Inflation has started to moderate but housing and services remain stubbornly high and are the major components of CPI remain stubbornly high

The FED will raise rates by 50 bps and reinforce the view that rates won’t be cut until 2024 which goes against market pricing but this market pricing is an aberration…

A Key Point to Keep In Mind - Bond Yields 

One key point to keep in mind is that while many forecasters in the market are putting the fall in bond yields and the USD down to the market view that inflation is beaten this is now the complete story a lot of the move is due to squaring of positions…

 Market rates have kept falling rapidly ever since the CPI last month and these falling rates have dragged the USD down. Even on realizes of stronger macro data, the close has been lower after an intraday attempt to rally what explains this?

The sell-off in bonds is probably mostly re-adjustment in the bond market of existing traders after a full month and close to 100bps, this re-positioning could be coming to an end. After the CPI print came in slower, removing the fear of a strong upward move and an even more hawkish Fed, we saw a move by traders to cover bond and equity shorts to protect year-end balance sheet profits.

The move was not new investors coming into buy bonds and equities but an adjustment of existing open positions. The equity rally has lost steam and we expect lower prices, and we expect bond yields to move back to the upside which will spill over into USD strength.

Technical Analysis

The key levels to watch at present in terms of support and resistance are on the chart below.