US Dollar analysis ahead of pivotal CPI reading

The US Dollar Index (DXY) has closed its fourth consecutive day in the red, reaching levels last seen in early May 2023.

Despite the recent decline, the DXY is coming into support around the 100 level, which has proven to be a resilient bounce point multiple times. However, each bounce appears to be getting smaller, which might indicate growing downward pressure. This support level adds an interesting dynamic to the market as traders watch for potential price reaction.

Todays US CPI print may hold the key to determining the DXY’s future trajectory. If the CPI data is reported higher than expected, it could potentially fuel speculation of tighter monetary policy by the Federal Reserve. In such a scenario, we might see the DXY experiencing a short-term rebound, as higher interest rates tend to attract investors seeking stronger returns.

On the other hand, if the CPI data comes in lower than expected, market participants might interpret it as a sign that the US Federal Reserve will maintain its current pause in interest rate hikes during their upcoming FOMC meetings.

If that occurs, it could potentially exert downward pressure on the US Dollar. A more accommodative monetary policy stance may reduce the attractiveness of the USD to investors seeking higher yields, leading to a potential decline in its value against other currencies and potentially sending the DXY below 100 for the first time since early 2022.

US CPI will be released at 08:30 EDT , YoY is expected to come in at 3.1%, with MoM expected at 0.3%