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On March 12, 2025, traders are bracing for the latest Consumer Price Index (CPI) report, a pivotal event that could determine whether the U.S. dollar extends its recent slide or stages a sharp reversal. After a multi-week selloff driven by cooling growth expectations and dovish Fed rhetoric, the greenback is hovering near key technical support. The question is: can the dollar turn lower again, or is a bounce imminent?
Economists polled by major financial institutions expect headline CPI to rise 0.3% month-over-month, with the annual rate holding steady at 2.6%. Core CPI, which excludes volatile food and energy prices, is forecast to increase 0.3% monthly, keeping the year-over-year figure at 3.1%. These numbers, if realized, would suggest inflation remains sticky but not accelerating—a scenario that gives the Fed little reason to adjust its current cautious stance.
However, the consensus masks significant dispersion. Some analysts, citing recent upticks in used car prices and airfares, see upside risk to the core print. Others point to declining shelter costs—a lagging but crucial component—as evidence that disinflation is still on track. The market-implied probability of a rate cut in May currently stands at 45%, down from 65% just two weeks ago, indicating that the dollar’s recent weakness may already be pricing in a softer CPI print.
The dollar index (DXY) has dropped roughly 3% from its February highs, breaking below the 104.00 support level. Three factors have driven this decline:
Weakening U.S. Economic Data: The ISM manufacturing and services PMIs both fell below expectations in February, while jobless claims ticked higher. The Atlanta Fed’s GDPNow tracker now estimates Q1 GDP growth at just 1.4%, well below the 2.5% consensus at the start of the year.
Dovish Fed Signals: Chair Jerome Powell’s recent testimony to Congress emphasized patience and data dependency, but also acknowledged that the labor market is cooling. Markets interpreted this as a green light for rate cuts later this year, pressuring the dollar.
Global Risk Appetite Improvement: Equities have rallied, and the euro and yen have strengthened on improved economic outlooks in Europe and Japan. The ECB’s hawkish hold in March and the Bank of Japan’s rate hike expectations have diverted capital away from USD-denominated assets.
An exclusive analysis of CME FX options data reveals that the 1-week risk reversal for EUR/USD has turned strongly negative for USD puts, indicating that the market is heavily hedged against a dollar rally. Meanwhile, the 1-month 25-delta risk reversal for USD/JPY is near its most bearish reading for the dollar in six months. This suggests that professional traders are positioning for further dollar weakness. However, such concentrated positioning often precedes short-term reversals when the data surprises.
If CPI comes in below expectations—say, headline at 0.1% or lower—the dollar could breach the 103.00 level, targeting the 102.50 support zone last seen in January. A move below 102.00 would open the door to the 100-day moving average near 101.80. In that scenario, the dollar would likely weaken across the board, with EUR/USD pushing above 1.0950 and USD/JPY falling toward 149.00.
Conversely, a hot CPI print—headline above 0.4%—would force a repricing of rate cut expectations. The dollar could snap back to 104.50, invalidating the bearish trend. EUR/USD would likely drop to 1.0800, and GBP/USD could test 1.2600.
The CPI release comes just days before the Fed’s March 19-20 FOMC meeting, where the central bank is widely expected to hold rates steady at 5.25-5.50%. A hot CPI would solidify the “higher for longer” narrative, while a soft print would renew calls for a May cut. The dot plot, which will be updated at the March meeting, could show a shift from three cuts projected in December to possibly two, or even one, depending on the cumulative data.
It’s worth noting that the Fed’s preferred inflation gauge—the Personal Consumption Expenditures (PCE) price index—has been trending lower than CPI. If CPI cools, the gap between CPI and PCE will narrow, giving the Fed more confidence that inflation is sustainably heading toward 2%.
From a technical perspective, the DXY is testing the 61.8% Fibonacci retracement of the November 2024 to February 2025 rally, near 103.70. A close below this level would confirm a bearish breakdown. The next support is the 200-day moving average at 103.20, followed by the 100-week moving average at 102.80.
Resistance is at 104.50 (the 50-day moving average) and 105.00 (the recent breakdown level). The RSI on the daily chart is at 40, not yet oversold, suggesting room for further downside.
The dollar’s near-term fate hinges on the CPI print. While the broader trend remains bearish on the back of slowing growth and a dovish Fed, the market is already short dollars and long euros/yen. This positioning makes the dollar vulnerable to a squeeze if inflation surprises to the upside. For traders, the key is to watch not only the headline number but also the components—especially shelter and services inflation—which will shape the Fed’s reaction function.
As of March 12, 2025, the path of least resistance for the dollar is lower, but a strong CPI could quickly shift the narrative. The next few hours will be decisive.
