US dollar nosedives as the end of the Fed's hike cycle in sight

The US dollar recorded its worst day in 2023, dipping more than 1.5% on Tuesday, as the US Consumer Price Index (CPI) for October cemented the view that the Federal Reserve has done hiking interest rates.

US CPI review

According to the Bureau of Labor Statistics, in October 2023, the United States' Consumer Price Index (CPI) increased by 3.2% year on year, marking a notable decrease from the 3.7% recorded in the previous month and falling below the anticipated rate of 3.5%.

Overall, inflation seems to be resuming a broad-based slowdown, particularly evident as gasoline prices retreated during the first month of the fourth quarter. Gasoline prices saw a significant decline of 5% in October, in stark contrast to the 2.1% increase observed in September.

So, what’s next for Fed?

This week's inflation gauge adds further weight to the perception that the Federal Reserve has concluded its interest rate hikes, especially alleviating the resurging concern sparked by recent hawkish statements from Fed policymakers. Fed Chair Powell stated last week that they are "not confident" in meeting the inflation mandate with the current monetary policy and will be cautious about the risk of being misled by a few positive months of data. Despite this, Tuesday's Consumer Price Index (CPI) has prompted investors to firmly believe that the central bank’s unprecedented tightening journey has come to an end.

According to CME Fed Watch, the market currently perceives the probability of a rate hike in December/January as close to none. Furthermore, the likelihood of the first rate cut in June is approaching 50% now.

USD technical analysis

From a techinical point of view, the strong momentum for the greenback since July has clearly run out of steam, as evidenced by the breach of the months-long trendline as well as mid-term moving averages. The final layer of support before confirming a bearish turn for the price will focus on the 200-day moving average, which sits near 103/103.1 at the moment. Further down lies the psychological 100 mark. On the flip side, the 50-day SMA at 104.3 should serve as the imminent resistance line.