Market Overview

U.S. Dollar Consolidates as Traders Await Crucial Inflation Data

The U.S. dollar saw marginal losses on Monday, consolidating after traders shifted their focus to the upcoming U.S. inflation data for further guidance on interest rates on Wednesday as well as Jay Powells speech tomorrow.

Traders are awaiting the release of the latest U.S. inflation data, which is expected to play a pivotal role in shaping near-term sentiment regarding potential rate cuts. Analysts anticipate Wednesday’s crucial CPI report to show underlying inflation rising 3.6% on a year-over-year basis, marking the smallest increase in over three years.

However, it is important to note that a hotter-than-expected inflation reading could potentially price out rate cuts for the remainder of the year, which would likely provide support to the greenback.

In the short term, traders should closely monitor the inflation data. A higher-than-expected inflation reading could lead to a strengthening of the U.S. dollar, while a lower-than-expected reading may prompt a decline in the currency’s value. Higher inflation means the Fed is less likely to cut rates so its more difficult for stocks to rally.

In the medium term, the trajectory of the U.S. dollar will largely depend on the Federal Reserve’s stance on interest rates. If the central bank maintains a hawkish tone and signals a prolonged pause in rate cuts, the greenback may continue to find support. Conversely, if the Fed hints at a more accommodative monetary policy, the dollar could face downward pressure.

The recent short-term rally we see in e-mini S&P 500 futures could be completely erased if the inflation is much higher than expected. Be on your toes when the report comes out.

E-mini S&P 500 futures daily chart priced in the US Dollar