The US Dollar Index (DXY) is having a hard time holding onto its gains and is currently below the mid-98.00s during the Asian session. Traders are waiting for US inflation data. The dip below the 200-day simple moving average (SMA) is causing concern for those bullish on the USD, especially with the Federal Reserve showing dovish projections. The upcoming US Consumer Price Index (CPI) will give clues about the Federal Reserve’s future policies and how they will affect the USD. Expectations of a dovish Fed are due to a weakening job market and possibilities of interest rate cuts in 2026, which are putting pressure on the USD. Political factors may also play a role in the Federal Reserve’s decisions.

Federal Reserve’s Influence

Federal Reserve Governor Christopher Waller stresses the importance of central bank independence, providing some support for the USD despite the overall negative sentiment. However, technical indicators support this bearish outlook, indicating that the USD’s chances for recovery are limited, leading to cautious trading. The CPI is a crucial measure of inflation, reflecting price changes in goods and services. It’s important for assessing inflation trends and can influence the USD’s direction. A higher CPI reading could strengthen the USD. The next CPI report is due on December 18, 2025, and a 3.1% increase is anticipated, up from the previous 3%. The US Bureau of Labor Statistics tracks these figures monthly. The Federal Reserve aims to keep prices stable, but inflation issues have lingered due to pandemic-related challenges. With CPI hitting multi-decade highs because of supply issues, the Fed is considering tough measures to manage inflation.

Dollar Index Technical Analysis

The US Dollar Index is struggling below the mid-98.00 mark, and there’s little indication of upcoming strength ahead of today’s important inflation report. The index recently fell below its 200-day moving average, which is a bearish sign for the upcoming weeks. Any attempts to rise have failed at this level, indicating that sellers dominate the market. Dovish expectations around the Federal Reserve are primarily driving this weakness in the dollar. Markets anticipate at least two additional interest rate cuts in 2026, supported by recent signs of a slowing economy. For example, the Non-Farm Payrolls report for November 2025 showed job growth slowing to 145,000, which was below forecasts and confirms the trend of a weakening labor market. Today’s Consumer Price Index (CPI) data is the main focus, with predictions suggesting a slight increase to 3.1% year-over-year from the previous 3.0%. A reading at or below this expectation would likely reinforce the Fed’s inclination towards more rate cuts, further pushing the dollar down. We observed a similar situation in 2024 when inflation was above target, but the economic outlook pressured the Fed to ease policies. Political pressures also add to the bearish mood regarding the dollar. President Trump has expressed a desire for a Fed chair who supports significantly lower interest rates. While candidates like Governor Waller advocate for central bank independence, the market seems to view lower rates as the likely outcome. For derivative traders, this situation opens up strategies that can benefit from a weakening dollar or increased market volatility. Buying put options on the DXY or call options on major currencies like the Euro and Yen could be effective strategies to take advantage of potential dollar weakness. With today’s CPI release creating uncertainty, implied volatility is high, making options that profit from rapid price moves—regardless of direction—worth considering. From a technical perspective, the failure to retest the 200-day moving average confirms it as a strong resistance point. Any short-term dollar rallies toward this level should be seen as opportunities to sell. Given the broader economic context and this technical weakness, positioning for a continued downtrend in the dollar seems to be the main strategy for the upcoming weeks. Create your live VT Markets account and start trading now.

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