U.S Dollar Calm Ahead Of Inflation Data

In advance of U.S. consumer price data, which could offer more insight into when the Federal Reserve will reduce stimulus and raise interest rates, the greenback eased from a one-year high versus major peers on Wednesday.

A measure of the greenback’s value against six rivals, the dollar index drifted lower by 0.15% to 94.34 on Wednesday, after touching 94.56 index points for the first time since late September 2020.

A possible continuation pattern is developing on the daily chart of the US dollar index (DXY).

Though the trend favors an upside break, a reward to risk perspective would indicate that a breakdown to the downside first would be preferable and support would emerge around the 93.43 – 93.73 zone.

In the event that prices move higher, keep an eye on the September 2020 high since it makes a likely resistance level, followed by the 95-band area.

Further, the CPI will be of a lot of importance, so positioning may have to occur before then.

The risk is for inflation to remain high, causing market expectations for rate hikes to advance, which will strengthen the dollar. Although the greenback seems temporarily down, currency experts think it has more upside.

As expectations rose that the Fed would reduce its stimulus next month, interest rates would be raised later next year. The dollar gained on Tuesday as a result.

Markets are pricing about a 50-50 chance of a July rate hike after Fed Vice Chair Richard Clarida said overnight that the U.S. economy has begun to heal enough for the central bank to begin to wind down the asset-purchase program.

Energy prices have risen dramatically in recent weeks, prompting inflation concerns and speculation that the Fed will have to move more quickly than expected to normalize the policy stance.

Federal Reserve policymakers continue to predict a temporary nature of inflationary pressures.

In addition to Governors Lael Brainard and Michelle Bowman, the Fed is expected to release minutes from its September meeting later Wednesday.