Using the DXY to forecast US stocks ahead of the December CPI report

Next week will be busy for traders. Four central banks will publish their monetary decisions for the last time in 2022 (Federal Reserve, Swiss National Bank, Bank of England, European Central Bank).

But before any of these results are known, one piece of economic data could affect financial markets more. That is the month of December to us CBI report.

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Scheduled for release on Tuesday, the report mentions inflation data for November. The market expects inflation to ease further and annual CPI to decline to 7.3% from 7.7%.

Any surprise in the data can move financial markets. For example, in 2022, financial markets moved in a tight correlation dollar Index (DXY) and US stock markets. But if we had to choose which of the two markets is leading, it would probably be the DXY.

US stocks fell while the DXY topped

In a way, the inverse correlation between the DXY and US stocks makes sense – a strong dollar leads stock markets to fall and go the other way. The chart above reflects this powerful correlation in 2022.

Therefore, one can use the DXY as a leading market to predict the direction of the US stock market.

From a technical perspective, DXY formed a triangle in October that acted as an inversion pattern. That was also the time when the US stock markets crashed.

And that’s when US inflation data showed that it might be peaking. In other words, if next Tuesday’s inflation data shows further improvements, the DXY should give up some more of its 2022 gains, meaning US stocks could rally ahead of the holiday season.