We think the DXY is getting ready to move higher after its recent correction – we have seen some upside but expect more to come.

The DXY has been under pressure due to the market view before CPI that the Fed could cut by 50 bps this month and ease by over a 100 bps before the end of the year but today's CPI data should change this view and send the USD up from oversold.

  “The yield on the US 10-year Treasury inched higher to 3.67% after recent inflation data reinforced the view that the Fed will cut the main interest rate only by 25bps next week. The core CPI, which excludes food and energy, rose 0.3% in August, above forecasts of 0.2% and up from 0.2% in July, with a year-on-year gain of 3.2%, signaling persistent inflation pressures. Meanwhile, the headline CPI rose 0.2% month-over-month and 2.5% annually, marking its fifth straight month of easing due to lower gasoline prices.” (TRADING ECONOMICS)

Core CPI is above forecast and Supercore inflation which the Fed pays close attention to is firm (see charts at end of article) in our view today's data is bullish for the USD.

"This isn't the CPI report the market wanted to see. With core inflation coming in higher than expected, the Fed's path to a 50 basis point cut has become more complicated," (Seema Shah Principal Asset Management.) It should now be a 25 bps cut...

The Fed would have liked to have seen softer numbers in order to justify a potential 50-basis point cut at the upcoming meeting ... but this (data) probably makes it more likely that they proceed with a 25-bps cut," (Jason Pride Glenmede.)

We agree and inflation is not falling back much at all - "Although inflation has eased, it does not mean that the prices of things that people buy have actually fallen." (Lisa Sturtevant Bright MLS.) She adds "It just means that prices are not increasing as fast. In fact, U.S. consumers now are paying more than 20% more for goods and services than they were before the pandemic."

In the Fed funds futures market, traders priced in an 85% chance that the Federal Open Market Committee will approve a quarter percentage point, or 25 basis point, interest rate reduction when its meeting concludes according to the CME Group's Fed Watch tool. A 25% cut is discounted and won't hurt the USD and a 50 bps cut has seen the odds ease back from 30% to 20%.

We also think the USD could gain support from a stock market sell-off to correct overbought and also escalating geo-political concerns. We are bullish on the USD for more strength.

Technical Analysis

Our view of the technical action below and the important levels of support and resistance to look out for on the chart below.