The US dollar was modestly supported ahead of the US CPI release. Support was linked to a tech-led risk-off tone and short-term undervaluation versus G10 peers.
The CPI report was expected to have less market impact than the payrolls data. The Federal Reserve has indicated limited urgency to cut rates again.
January Cpi Expectations
January CPI was expected to match consensus at 0.3% month-on-month and 2.5% year-on-year for both headline and core CPI. This was expected to back recent hawkish repricing in Federal Reserve expectations.
Short-term undervaluation was described as a factor that could lift the dollar in the coming days. However, recent price action was said to point to selling into USD rallies and limited scope for recovery.
A recent US tech selloff was linked to a more supportive backdrop for the dollar. This was presented as evidence of returning safe-haven demand.
The USD was described as cheap against most G10 currencies. Medium-term bearish sentiment was still noted as a factor that could drive selling on rallies.
Options Strategy Considerations
The dollar is getting a slight lift before the January inflation report, helped by a minor selloff in tech stocks. The Nasdaq 100 has pulled back 3% from its late January highs, pushing some capital towards the dollar’s relative safety. This temporary strength comes as the dollar appears cheap against other major currencies.
We expect the upcoming Consumer Price Index to show inflation cooling to 2.5% year-over-year, which is in line with market consensus. This follows last week’s jobs report that showed a robust 225,000 new jobs, which has already pushed the market to scale back bets on a March rate cut. Fed funds futures now imply less than a 20% chance of a cut next month, supporting the dollar for now.
This dynamic creates an opportunity to sell into any dollar rallies that may follow the inflation data. A good strategy would be selling call options or establishing bear call spreads on the U.S. Dollar Index (DXY) at higher strike prices, such as the 105.50 level. This approach profits if the dollar’s strength fades as we believe the medium-term downward trend will resume.
We saw a similar pattern for much of 2025, where periods of dollar strength were short-lived as the Federal Reserve’s easing cycle was the dominant theme. After cutting rates three times in 2025, the central bank is now on hold, but the broader path of least resistance for the dollar remains lower. This historical context from last year suggests current strength is likely temporary.
With the market more focused on the jobs data, implied volatility on major currency pairs like EUR/USD has compressed ahead of the inflation print. This could make buying short-term options, such as weekly straddles or strangles, relatively inexpensive. Such a position would allow traders to profit from a larger-than-expected price move in either direction.
