US Dollar Awaits CPI Data – Will Reflation Trade Drive Moves?
The US dollar is holding steady into early trading on Tuesday as markets eagerly await the release of the CPI later this week to understand the effect of economic recovery on US’s inflation. At the time of writing, the US dollar index DXY is trading around 90.23.
In case the CPI reading comes in higher than forecast, it could raise expectations of inflation heating up as the US economy recovers from the coronavirus crisis, spurred by numerous rounds of fiscal stimulus measures and a rapid rollout of the COVID-19 vaccines. A stronger reading can potentially drive US Treasury yields higher, which in turn could increase investor interest in the US dollar over its peers.
The greenback is also trading cautious as markets wait to hear from Fed officials through the week. Their comments and hints on possible tightening of the monetary policy and thoughts on inflation would be key to driving moves in the US currency, as the focus is no longer on economic data but on future policy.
Meanwhile, commodity currencies have been gaining strength against the US dollar over rising hopes for the global economy to rebound out of the ongoing crisis soon. The CAD strengthened to the highest level in over three years while the AUD and NZD are trading at multi-week highs.
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