US CPI Preview: Slower inflation should strengthen the ceiling on the USD – Scotiabank

FXStreet Insights Team FXStreet

US Dollar (USD) trades mixed in narrow ranges versus majors ahead of the US Consumer Price Index (CPI) report on Tuesday. Economists at Scotiabank analyze Greenback’s outlook.

Flat USD looks to CPI for direction

The DXY is still effectively consolidating its early February push higher but the index was showing some signs of slipping last week. Price action on the day so far suggests the USD continues to pick up support on minor dips generally, with the index well-supported on weakness to the 104.00 area.

Beyond the price signals, the Dollar – still – looks a bit ‘rich’ in terms of short-term fair value (based solely on spreads) and, with US yields unable to extend significantly last week (US 10Y yields capped below the 4.20% area, for example), the potential for the USD to strengthen without the support of firmer data and higher yields looks quite limited at this point.

The USD’s short-term tone hinges largely on the US January CPI report on Tuesday. Slower inflation (which is expected) should strengthen the ceiling on the USD; sticky inflation will push back a bit harder on market pricing which is reluctant to give up in Fed May easing hopes, however, and give the USD a bit of a lift.

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FXStreet Insights Team

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