Consumers in the U. S. are expecting a significant reduction in price pressures next year. Friday’s benchmark survey showed that the annual U.S. inflation forecast in December fell to its lowest level in a year and a half. The annual inflation forecast released with the bi-monthly reading of overall consumer sentiment this month fell from 4.9% to 4.4%. Released inflation outlook also declined from the preliminary reading of 4.6% two weeks ago.
Inflation expectations are still above the Fed's 2% target level. However, lower consumers’ expectations could have a positive effect on inflation itself, forcing the Fed to reconsider its plans to raise rates. Against this backdrop, the dollar index will weaken.
In addition, the withdrawal from the protective asset (the dollar is considered as one) is linked to the continued loosening of COVID rules in China. The National Health Commission said late Monday night that it was taking an important step toward loosening restrictions. China will stop requiring incoming travelers to undergo quarantine starting Jan. 8. Analysts say the pace of easing restrictions has not slowed, despite a rise in COVID cases.
The weakness in the dollar index can also be linked to expectations of a potential Christmas rally in the world markets. At the moment the dollar is in a downtrend, and yesterday it reversed from its upper boundary. A descending triangle was formed inside this trend, the exit from which is near. That’s due to the strong volatility’s compression.
The potential for a move out of the triangle will be equal to the height. Also, if you overlay the Fibonacci levels from the entire dollar index growth wave in 2022, a downside target of 0.618 will be seen, which equals 102.4 points on the dollar index. This target roughly matches the height of the triangle on the way down, and there is also the lower boundary of the downtrend.
A stop-loss may be put on the exit up from the triangle and break the upper boundary of the trend, which is the level of 104.5 points on the dollar index.
Dollar index decline:
Take profit – 102,4
Stop-loss – 104,5