Ahead of the release of the inflation data later in the day, the US dollar is trading close to the highest levels seen in four months as investors expect a strong reading to further convince the Fed to start tapering stimulus. At the time of writing, the US dollar index DXY is trading around 93.14.

Ever since the release of the latest labor market report late last week, the US currency has been trading bullish against other major rivals over rising expectations for the Fed to reverse its dovish stance sooner than planned. The Euro is sliding towards the lowest levels seen so far this year while the Japanese yen is holding close to multi-week lows.

If today’s inflation report also delivers a positive surprise, the likelihood of the US central bank starting the tapering of its asset purchases will increase further. Economists recently polled by Reuters expect headline CPI to post a 0.5% increase MoM for July while on an annual basis, it is set to rise by 5.3%. A reading matching the forecast or higher will drive more strength in the US dollar later today.

In addition to the CPI data, investors will also keep an eye out for a speech by Kansas Fed President Esther George who could shed some light on when the central bank could start withdrawing stimulus and look at tightening monetary policy. The spread of the COVID-19 infections around the world will also be monitored as it is a key driver of market sentiment.