U.S. dollar rises across the board ahead of key CPI inflation data

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Vrasidas Neofytou
Head of Investment Research

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U.S. dollar rises across the board ahead of key CPI inflation data
The U.S. dollar has posted a significant rebound across the board since February 01, 2023, gaining support from the stronger-than-expected U.S. macroeconomic data, the hawkish messages by the policymakers ahead of the key U.S. CPI- consumer inflation data due on Tuesday that might give more clarity over the Fed’s rate hike intentions.

More robust jobs data and solid economic readings saw markets last week have to recalibrate expectations for how high the Federal Reserve may need to raise rates this year to curb the record-high inflation.

On top of that, Federal Reserve speakers reiterated their hawkish messages that there is more work to be done to tame inflation, triggering a rebound on the dollar against other currencies.

Following a four-month downturn momentum, the DXY-U.S. dollar index which tracks the greenback against six major peers retreated from the multi-year high of 115 hit in late September 2022 to yearly lows of nearly 100 level at the end of January 2023.

DXY-U.S. dollar index, 2-hour chart

However, after the FOMC policy meeting on February 01, 2023, the dollar enjoys a strong rebound toward the 104 level, driven by the hot U.S nonfarm payrolls reading for January, the sharp bounce in the services ISM last month.

Surging yields give support on the dollar as well, with the yield on the 10-year bond bouncing from the lower end of its range that goes back to the middle of last September (3.30%) to the upper end near a five-week high of 3.75% on expectations for more rate hikes by the Fed.

CPI-inflation data due on Tuesday:

Investors look ahead to the well-expected January U.S. CPI consumer inflation data due on Tuesday that might provide more cues on monetary policy and the price trajectory of the dollar.

While the reading is expected to show further easing in inflation in January 2023 to 6.2% vs 6.5% in December 2022, it is still expected to remain relatively high, which could invite more interest rate hikes by the Federal Reserve.

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