US CPI will be out tomorrow, but as you noticed yourself its still trapped in this range for the last two months, if not more, so the dollar is still not going anywhere, yet! My assumption, however, is that the range could be broken to the downside. How far the dollar can actually drop is yet to be discovered, but I’m looking for a potential breach below the July lows to complete an ending diagonal, and then maybe see a reversal later on.
Before going to the Dollar Index chart and wave count, I want to touch on US CPI and crude oil. Tomorrow we get US inflation data, and this will be the most important release since August jobs came out below expectations. Markets believe Powell will cut rates this month, the only question is how much. He could even surprise and cut more than expected. It’s no wonder that US yields are already trading significantly lower, but what could cause further dollar weakness is exactly this CPI print.
To figure out CPI, it makes sense to look at crude oil, which is a key driver of prices. Crude dropped around 12% in August and closed the month down about 8.5%. That was a sharp fall in energy prices, and given this, I would not be surprised if US inflation stays flat or maybe even softens on a yearly basis. The official expectation is for CPI to rise to 2.9% from 2.7%. So even if inflation prints at 2.9%, the dollar may not react much since that’s in line with forecasts. But if it comes in softer, below 2.9%—or even back at 2.7%—then the dollar could see an aggressive sell-off, especially with weakening jobs data already in place. This would put us much closer to aggressive cuts from Powell.
Looking at Elliott Wave on the Dollar Index, the most important point is that the rise from July lows unfolded in three waves. A three-wave move against a strong downtrend suggests a correction, meaning more weakness could follow, especially as price has already broke out of the corrective channel. So wave C of wave five could still come, targeting below 96. But once new lows are reached, we should be cautious—ending diagonals are reversal patterns and can signal completion of the higher-degree trend.
Keep in mind what happened back in September 2024. The dollar traded lower into the cut on expectations, but just days after Powell actually cut, the dollar stabilized and turned into a 4-month recovery. So I’m wondering if this time we could see something similar: another leg lower into CPI and the Fed, then an unexpected reversal if Powell this month cut more than market expected, but then give us some indications, that there may not be lot of cuts left in months ahead.
Hope you enjoyed the piece of mine.
Trade well,
Grega
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