Detailed Analysis of US CPI Y/Y 15-Jan-2025

The US Consumer Price Index (CPI) is a key inflation gauge that measures the annual change in the price of goods and services. It serves as a critical indicator for assessing economic health and the Federal Reserve’s monetary policy stance, making it a high-impact data release in the forex market.

Past Performance

Historical Trends

• Recent Performance:
  • November 2024: CPI y/y stood at 3.2%, slightly higher than the forecast of 3.1%, indicating moderate inflationary pressures.
  • October 2024: CPI y/y was at 3.1%, in line with expectations, suggesting that inflation is stabilizing but still above the Federal Reserve’s long-term target of 2%.
• Trend Analysis: Over the past year, CPI y/y has shown a gradual decline from its peak of 9.1% in June 2022, as the Fed’s aggressive interest rate hikes have successfully reduced inflationary pressures.

Technical Context

• Dollar Index (DXY):
  • Historical CPI releases above forecasts often triggered a bullish rally, as traders priced in tighter monetary policy.
  • Fibonacci levels indicated key retracement points during post-CPI volatility.

Current Situation

December 2024 CPI y/y Expectations

• Forecast: Current market consensus expects CPI y/y to hold steady at 3.2%, aligning with November’s print.
• Market Sensitivity:
  • A print above 3.2% would likely reaffirm hawkish expectations from the Federal Reserve, boosting the USD.
  • A downside surprise below 3.0% could spur USD weakness, as it may indicate the Fed’s efforts to control inflation are yielding results.

Technical Indicators

• RSI (14): The U.S. Dollar Index is hovering at an RSI of 65, near overbought territory, suggesting limited upside unless CPI surprises significantly to the upside.
• Moving Averages:
  • The 50-day SMA has crossed above the 200-day SMA, forming a golden cross, which is a bullish signal.
• Bollinger Bands: USD pairs are approaching the upper band, signaling potential volatility following the CPI release.

Future Outlook

Federal Reserve Implications

• If CPI y/y remains above 3.0%, it may prompt the Federal Reserve to maintain a restrictive monetary stance, supporting further rate hikes in 2024.
• A decline below 2.9% could ease market concerns, increasing the likelihood of a rate pause in the near term.

Economic Factors

• Energy Prices: Recent fluctuations in oil prices may contribute to CPI volatility. A drop in energy costs could pull inflation lower.
• Wage Inflation: Persistent wage growth could sustain inflationary pressures, keeping CPI elevated.

Currency-Specific Analysis

• USD/JPY:
  • Bullish if CPI exceeds expectations, targeting 150.50.
  • Support is observed at 148.00, with resistance near 151.20 based on Fibonacci extensions.
• EUR/USD:
  • Bearish bias in case of strong CPI data. Break below 1.0700 could open the door to 1.0650.
  • Resistance is firm near 1.0830, where sellers are likely to emerge.

Currency Impact

Direct Effects on USD

• A higher-than-expected CPI will likely strengthen the USD due to increased hawkishness from the Fed.
• Conversely, a softer CPI will likely weaken the USD as markets adjust to the potential for monetary easing.

Cross-Market Dynamics

• Gold (XAU/USD):
  • Inversely correlated with the USD, higher CPI could weigh on gold prices. Key support lies at $1,920, with resistance near $1,950.
• Stock Markets:
  • Equity indices such as the S&P 500 tend to react negatively to high CPI due to concerns over tighter monetary policy.