US dollar bears pile in despite red hot inflation, eyes on 110.00 as the box breaks down

• The US dollar is in the hands of the bears despite US CPI data. 
• The market is moving out of a speculative US dollar position. 

As measured by the DXY index, the US dollar has been a mixed bag on Thursday, initially rallying on the back of the red-hot US inflation data only to fall into the hands of the bears, dropping by 1% to almost 112.14 as risk sentiment returned to markets. At the time of writing, the DXY index is down by some 0.66% having fallen from a high of 113.92 to a low of 112.147 so far. 

Hot US CPI burns Fed pivot sentiment 

First off, US inflation eased less than expected in September to 8.2%, and underlying prices excluding energy and food prices accelerated to a new four-decade high.

• US CPI (MoM) Sep: 0.4% (est 0.2%; prev 0.1%).
• US CPI (Y0Y) Sep: 8.2% (est 8.1%; prev 8.3%).
• US CPI Core (M0M) Sep: 0.6% (est 0.2%; prev 0.6%).
• US CPI Core (Y0Y) Sep: 6.6% (est 6.5%; prev 6.3%).

Core CPI gained at its highest annual pace in 40 years, rising 0.6% for the month and 6.6% for the year and Fed funds futures are now pricing in 75 bps in December, up from 50. Moreover, terminal rate expectations rose to 4.85% in March. As a consequence, the 10-year Treasury yield rallied to 4.080% while the 2-year yield was up to 4.535%. 

Following the CPI report, the DXY index shot higher to 113.92 but dropped sharply shortly after as the US stock market regained ground. Nevertheless, sky-high inflation shows no signs of easing and investors are now pricing in 91% odds of a fourth straight 75-basis-point hike by the Fed at its meeting next month, with some also pricing in a 9% chance of a 100 bps rise. The possibility of a 100 basis points increase in November has also reared its head, though it's currently seen as unlikely, with only a 9% probability.  The bottom line, there are no chances of a near-term dovish pivot from the Fed.

However, some price discovery made its way onto Wall Street with no sellers left as the benchmarks danced around a 50% retracement of the March 2020 bull market. Investors are turning their attention to the third-quarter earnings at the end of the week. At 3.33 p.m. ET, the Dow Jones Industrial Average was up 880 points, or 3.00%, at 30,090 and had recovered from the low of the day down at 28,660.94. The 10-year Treasury yield is still up 1.44% but below the 4.080 highs, around 3.952% and the DXY sags down 0.69% on the day. 

US dollar technical analysis

The price is now making a technical case for the downside in a sell-the-fact scenario. The bears are pressing below Tuesday's low, Nonfarm Payroll's high, and trendline support. While below 112.50, there is plenty of space to go until last week's low near 110 the figure.