Pre-CPI USD Price Action Setups: SPX Pullback after DXY Stretch

US Dollar, SPX Talking Points:

• Tomorrow’s U.S. CPI release can bring some volatility, and this can impact a wide range of markets from bonds, stocks and currencies.
• The U.S. Dollar has been strong since the Q4 open even with the FOMC cutting rates, and one of the reasons for that has been rising inflation as U.S. CPI has printed at 2.4% YoY at the October release, followed by 2.6% at the release in November and then 2.7% in December. Tomorrow is expected to bring another jump and this time it’s to 2.9%.
• If headline CPI prints with a 3-handle, however, there could be fast re-pricing across markets, with USD strength to go along with higher U.S. Treasury yields and lower stock prices. If the data point prints below expectations, however, there could be motive for profit taking in USD trends which could help to buoy equities and major FX pairs such as EUR/USD and AUD/USD.
• SPX finished off the gap from the election at this week’s open, and that was a big spot looked at in the 2025 Forecast for Indices.

Tomorrow’s CPI print feels important given early-2025 price action. Both the U.S. Dollar and. U.S. Treasury yields have pushed-higher and this has started to take a toll on equities as SPX has pulled back by as much as 5.36% from the December high.

Interestingly, it’s 10-year yields that have been in the midst of a massive move as the benchmark Treasury has gained as much as 120 basis points from the September low, which was just ahead of the Fed’s first rate cut of this cycle. And despite the Fed continuing to cut rates, longer-term Treasuries have seen yields continue to rise and at this point the 10-year has traded above the 4.74% marker that’s been a point of pain for equities over the past couple of years. I showed this in the webinar that’s linked above and this remains a point of contention as we move into CPI data tomorrow morning.

Even though the Fed has been cutting since mid-September, inflation data has been pushing higher of late and this is likely playing a role in the higher yields that have shown deeper on the Treasury curve. But, also highlighted in the webinar was the yield curve, which has been steepening as that dynamic has played out. From the Federal Reserve’s own research, the yield curve is considered a leading indicator for recessionary potential, with the FOMC focusing on the spread between 3-month and 10-year Treasuries.

The Fed talks about this on the NY Federal Reserve website, on a page entitled ‘The Yield Curve as a Leading Indicator.’

U.S. Dollar

At last Tuesday’s webinar the USD had already started to bounce from a support zone and that move largely continued until this week’s open. And for this week’s webinar, the USD was still in the process of pulling back following the PPI data that was released earlier in the morning.

This highlights deeper support potential around the Fibonacci levels plotted from 108.74-108.97, and then below that is the same zone from last week plotted from 107.74-107.99. If bears can elicit a daily close below that zone, then larger pullback or reversal scenarios could become of interest and this could also play into strength scenarios for SPX.

For resistance, it’s the 110.00 level that looms large as this week’s open saw the first test above that level since November of 2022, and that’s the spot that bulls were unable to do much above.

U.S. Dollar Daily Price Chart

SPX

As Treasury yields have run-higher and USD-strength has persisted, there’s finally been a toll taken on equities and SPX gapped-down yesterday morning to tally a 5.36% move off of the prior high.

But – that gap-down yesterday happened at a major spot, as the election gap has now been filled in. This was the first zone of support that I looked at in the indices forecast as well as my top trade idea for 2025.

As shared in the webinar, it’s still early, and so far, there’s been a hold of resistance for today at the top-end of that gap. But this is another market that’s likely contingent on how CPI rolls out tomorrow, and if it comes out soft, we could see sellers pull back a bit and this then exposes another gap on the chart, from 5881 up to 5917.50, and above that is another key level at 5,942.

If that CPI release prints with a 3-handle, that’s when I think we could see some worry in equities as the 10-year makes a move on 5% and I think that would also come along with fresh highs in the USD. But, given how overbought the USD is at the moment and how quickly yields have risen, it would be an opportune time for a pullback at which point we could get some information to grade trends and investigate continuation.

For SPX, I would want to see bulls pose a break above 5942 and then a re-test of the 6k handle to exhibit greater control on a bigger picture basis.

S&P 500 (SPX) Daily Price Chart

--- written by James Stanley, Senior Strategist