U.S. Dollar Index (DX) Futures Technical Analysis – Stable Trade Suggests Inflation May Surprise to Upside

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The U.S. Dollar is inching lower against a basket of its peers on Thursday as traders await the release of a key U.S. consumer inflation report that could determine the size of the Fed’s next interest rate hike at its December policy meeting.

Traders expect the report to show a slight dip in annual headline and core inflation, but it’s still running high. It may come in a little below the September report’s figures, but it’s still well above the central bank’s mandate of 2%.

At 08:49 GMT, December U.S. Dollar Index futures are trading 110.290, down 0.170 or -0.15%. On Wednesday, the Invesco DB US Dollar Index Bullish Fund ETF (UUP) settled at $29.75, up $0.22 or +0.74%.

Dollar Advances on Wednesday

The dollar advanced against most major currencies on Wednesday, as results so far for the U.S. midterm elections showed little evidence of a “red wave” resounding Republican victory that some expected, leaving investors to focus on upcoming inflation data.

The greenback was also supported by a bout of risk aversion ahead of today’s inflation report and a second day of weakness in cryptocurrencies as investors continued to fret about the stability of the sector and the financial health of major exchange FTX as a plan for a rescue deal from bitter rival Binance collapsed.

Consumer Inflation Expectations

Economists are expecting a deceleration in both the monthly and yearly headline and core inflation.

Headline inflation is expected to come in at 0.6% for the month, generating a 7.9% annual reading. Core inflation is estimated to have risen by 0.5% in October, giving us a year-over-year reading of 6.5%.

Traders have been pricing in these figures for about a week, but Wednesday’s reversal to the upside suggests investors may be bracing for an upside surprise.

Daily December US Dollar Index

Daily Swing Chart Technical Analysis

The main trend is down according to the daily swing chart. A trade through 109.240 will signal a resumption of the downtrend. A trade through 113.045 will change the main trend to up.

The main range is 104.150 to 114.745. The index found support on Tuesday inside its retracement zone at 109.448 to 108.197.

The intermediate range is 107.450 to 114.745. The index is currently testing its retracement zone at 110.237 to 111.098.

The short-term range is 114.745 to 109.240. Its retracement zone 111.993 to 112.642 is another potential upside target.

Daily Swing Chart Technical Forecast

Trader reaction to the short-term Fibonacci level at 110.237 is likely to determine the direction of the December U.S. Dollar Index on Thursday.

Bullish Scenario

A sustained move over 110.237 will indicate the presence of buyers. If this creates enough upside momentum then look for a surge into 111.098. Sellers could come in on the first test of this level, but overcoming it could trigger an acceleration to the upside.

Bearish Scenario

A sustained move under 110.237 will signal the presence of sellers. This could trigger a break into 109.448, followed by 109.240. A trade through this level could trigger a further decline into a support cluster at 108.197 to 107.780.

Side Notes

One reason why we could see an upside surprise is because the report has come in hotter than expected in 5 out of the last 6 months.