US Dollar Gears Up for Big Move on Today's CPI Report: Pairs and Levels to Trade

All eyes are turned on the upcoming release of the US inflation report scheduled for 13:30 GMT, with the potential to ignite much-needed volatility for the US dollar index and FX markets in general after a rather subdued period so far this week.

Among the major currency pairs, the USD/JPY and USD/CAD stand out as ones gearing up for potentially significant moves, but don’t forget about the other major pairs, as well as gold and silver.

Anticipated US CPI Figures

Before delving into which levels to watch, let's revisit the key aspects to observe in Thursday's Consumer Price Index (CPI) report.

Analysts are predicting that headline US CPI data will reveal a rise in inflation to an annual rate of 3.2% in December on a headline basis, compared to 3.1% in November. On a monthly basis, the CPI is expected to increase by 0.2%, following a 0.1% rise in the previous month. The core reading, which excludes food and energy, is projected to be at 3.8% year-on-year or 0.3% month-on-month.

Don’t forget that the devil is in the detail, and it is important to consider the influences behind December’s inflation data as they could sometimes be more important than the headline figures themselves.

Dollar Index technical analysis

Following last week's rebound, the dollar index has shown marginal downward movement ahead of the CPI data, displaying limited fluctuations in either direction, which is hardly surprising.

The prevailing trend for the dollar is arguably bearish, as evidenced by objective technical factors like the 200-day average positioning above the market and the occurrence of lower lows on larger time frames since its peak in October around 107.35.

From a technical standpoint, I am inclined towards selling the dollar near resistance rather than buying it at support. Considering this perspective, the critical resistance zone to monitor today lies within the range of 102.45 to 103.00. This zone had previously served as robust support in both August and November, only to relinquish its strength following the Federal Reserve's last policy meeting in mid-December.

As long as the 102.45 to 103.00 area holds as resistance today, a bearish bias on the dollar is likely to persist, potentially regardless of the strength or weakness of the CPI data. It is the market's reaction to news, rather than the news itself, that holds greater significance for traders.

In this potential scenario, there is a possibility of the DXY drifting back down towards the December low of 100.61.

However, if the 102.45 to 103.00 resistance area is breached, it could trigger subsequent technical buying, potentially propelling the index towards the 200-day moving average and the subsequent resistance zone in the 103.45 to 103.50 range.

CPI trade ideas: USD/JPY and USD/CAD

There are obviously many ways to trade the CPI report. One approach is to adopt a proactive stance by initiating a modest-sized position before the report, with the intent to augment its post-release if you anticipate either positive or negative surprises.

However, for those who prefer a more cautious trading style, exercising patience and waiting for the actual data to unfold may be more prudent.

In the realm of less aggressive trading, it's worth noting that the initial market response driven by the data often retraces before establishing a more sustained direction, occasionally even executing a complete reversal.

Additionally, an in-line CPI reading has the potential to exert downward pressure on the dollar, especially if the market has positioned itself for a robust report, as evidenced by the dollar's ascent in the previous week.

For traders inclined towards a conservative approach, the optimal strategy may involve waiting until after the data is released, observing the market's reaction, and then making informed decisions. This could entail considering buying near support if the market has risen or selling into resistance if the data disappoints.

While the DXY is a viable instrument for trading the CPI itself, it's sometimes beneficial to have a dual approach by identifying two contrasting FX pairs. Depending on the data outcome, one can opt to trade either of them.

For instance, the JPY has displayed weakness recently, triggered by Tokyo CPI falling slightly below forecasts and a substantial contraction in wage growth. This suggests that the Bank of Japan might delay its policy normalization process.

Consequently, USD/JPY becomes a potential long candidate if the CPI data proves stronger. Conversely, commodity dollars like the AUD or CAD might present attractive long opportunities in an overall bullish risk environment, making USD/CAD a suitable short candidate if the data misses or if the US dollar reacts negatively to the inflation report.

USD/JPY key levels

Support levels:

• 145.00, a psychologically important level, now that we are trading above it
• 144.62, the head of the hammer candle from Tuesday
• 143.40ish, the 200-day average – bias will turn bearish if this level breaks decisively

Resistance levels:

• 146.00, where I am anticipating a pool of liquidity above last week’s high (145.98) rests (potentially a cluster of buy-stop orders from people who are short)
• 146.60ish, the pre-FOMC high made in December 11

USD/CAD key levels

Support Levels:

• 1.3345, the post-NFP low made on Monday – a break below here would be a bearish outcome and a signal the bear trend has potentially resumed
• 1.3177, the late December low - this is a recent support level, and the fact that the price bounced from here suggests that there could be buying interest in this area in the event we get there or thereabout in the next few days

Resistance Levels:

• 1.3380 to 1.3420 area: This is the current key area of potential resistance, which had acted as a barrier in the past. If the price manages to break above this range, it could indicate a bullish trend continuation.
• 1.3480 to 1.3500 area, which is where the 200-day average, the base of the FOMC breakdown and the next psychological level all converge, making it significantly important.
  
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Disclaimer: This article is written for informational purposes only; it does not constitute a solicitation, offer, advice, or recommendation to invest as such it is not intended to incentivize the purchase of assets in any way. I would like to remind you that any type of asset, is evaluated from multiple points of view and is highly risky and therefore, any investment decision and the associated risk remains with the investor.

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