Will December’s US inflation report rescue the Dollar?

The Dollar sharply depreciated against a basket of major currencies on Friday after weaker-than-expected U.S. factory inflation data doused market optimism over inflation accelerating in 2018.

U.S. producer prices dished out a downside surprise by falling 0.1 in December which was the first decline in nearly 18 months. With yesterday’s soft factory inflation figures leaving a bitter aftertaste on rate hike expectations, today’s pending CPI data is a big deal and potential market shaker. The headline CPI is expected to decelerate to 2.1% y/y in December, while core inflation is predicted to remain steady at 1.7% y/y. A disappointing U.S. inflation report that prints below market expectations has the ability to fuel growing dissent within the Fed on when to raise U.S. rates. Naturally, the renewed concerns over low inflation in the States are likely to cloud prospects of higher U.S. interest rates, ultimately punishing the Dollar.

Alternatively, the Greenback could be granted a lifeline today if inflation figures offer an upside surprise and defy market expectations.

Focus will also be directed towards the U.S. retail sales figures which are expected to be +0.4% for the month of December. A retail sales figure that meets or exceeds market expectations could boost sentiment towards the U.S. economy and provide some support to the vulnerable Dollar.

Taking a look at the technical picture, the Dollar Index is unquestionably bearish on the daily charts as there have been consistently lower lows and lower highs. The decisive break down below the 91.80 support level has opened a path lower towards 91.20 and 91.00, respectively.