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January 13, 2022

CPI Climbs 7%, USD Could Be Bearish Now

Frank Cabibi

CPI numbers came in yesterday indicating a 7% climb in inflation from last month. This is some bad news for the Fed, USD, and stock market which could lead to a short term bearish trend until the Fed raises rates. This report should be bullish for the USD in the longer term since investors can be more certain that rate hikes are coming, but the dollar is still dropping. Here's why the USD could be bearish.

Why USD Could Be Bearish

There are a couple reasons to why the dollar could still be bearish right now. That is probably because the three 25 bp hikes the Fed wants to do might not be enough to offset the rapid rise in inflation. According to TradingEconomics, the inflation rate is expected to trend upward to 1.90% by 2023, so even the 0.9% interest hike the Fed plans to do might not be enough to a big enough policy to keep inflation under control.

We also don't know for sure whether or not the Fed will pursue this plan to go from near-zero percent interest to nearly 1% by the end of the year. The original plan was a 0.3% hike, now it's 0.9%. We may have to see a larger hike for investors to feel comfortable with the USD's strength. So, in the meantime, the USD could be bearish.

According to COT data, institutional interest is on the short side of the trade which means it's more likely we see a downtrend than a rally. The way CPI is trending seems like the 7% rise is not the top for the inflation index.

DXY (Dollar Index)

USD Could Be Bearish
DXY crossed under a major supportive trend line and is testing support at 94.500s. This is a key level the dollar is testing as a break under could lead to further downside to possibly the 200 DMA which is another 1.6% below.

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