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US inflation report: Impact on the dollar 

May 14, 2024

Key Points: 

  • The momentum of the USD has been influenced by hawkish monetary policy, with fewer than two rate cuts to be expected in 2024. 
  • Recent softening economic data, including employment and manufacturing indicators, hint at a potential reversal in the strength of the USD. 

The upcoming US inflation report is expected to play a key role in shaping the value of the USD and guiding perceptions of next moves by the Federal Reserve. Over the past months, the dollar has enjoyed a rally, driven primarily by a shift in expectations towards a less accommodative monetary policy by the US Federal Reserve. This perception is supported by the markets projecting fewer than two rate cuts in 2024. 

The USD uptrend is slowing down 

However, this uptrend in the dollar has recently lost some steam. A series of economic reports — slightly weaker payroll numbers, Purchasing Managers’ Index (PMI) surveys, and the latest jobless claims — suggest a softening in the economic backdrop.

The jobless claims, though influenced by seasonal factors, together with other data, paint a picture that the US economy might not be as robust as previously perceived. 

At the same time, the weakening of USD is also further supported by a comparison to its global counterparts. A recent dovish stance by the Bank of England suggests a growing market inclination towards betting against the USD. 

Overoptimistic and overbought 

Additionally, the US data slowdown coincides with positions heavily favoring the dollar (dollar net longs) have become crowded – or typically called as an “overbought” situation spoken among traders. This could imply that the market is overly optimistic about the strength of the USD, leaving it vulnerable to a correction should economic indicators continue to disappoint. 

Chair Jerome Powell of the Federal Reserve recently indicated a potential halt to rate hikes during the May policy meeting. This pivot introduces a new dynamic into the market, setting the stage for a possible recalibration of interest rate expectations.

Should the upcoming Consumer Price Index (CPI) report come below expectations or barely meet them, the market might begin to anticipate rate cuts. Conversely, a higher-than-expected CPI could validate the current hawkish outlook, albeit temporarily. 

Keep an eye on the CPI data release 

Traders should closely monitor the CPI data release, as it will provide vital clues about the short-term direction of the USD and potentially form a critical part of any currency pairs involving the USD.

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