Market update: Dollar eases ahead of key U.S. inflation data


The U.S. dollar weakened slightly on early Monday as traders anticipated the release of key inflation data from the U.S. later this week to provide further insights into whether the Federal Reserve would continue raising interest rates.

The dollar index, a measure against a basket of foreign currencies, ended the previous trading day at 105.86. However, as of writing, it has declined to 105.77.

The U.S. government will publish October’s consumer price index (CPI) on Tuesday. Financial firm HSBC anticipates the core CPI to remain unchanged from the previous month, while further signs of disinflation may not emerge until February 2024.

The DailyFX released a similar forecast on Sunday. Headline CPI is expected to have increased by 0.1 percent on a seasonally adjusted basis last month, resulting in a decline in the annual rate from 3.7 percent to 3.3 percent.

Meanwhile, the core indicator, which excludes food and energy, is projected to rise by 0.3 percent monthly, leading to a year-over-year reading of 4.3 percent, matching September’s result.

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Retail sales figures, which will shed light on the health of the U.S. economy, will be released a day after the CPI. Previously, retail sales demonstrated economic resilience despite rising borrowing costs.

The Fed’s recent policy meeting adopted a less hawkish tone, although Chair Jerome Powell acknowledged that the fight against inflation is still ongoing.

Traders also look forward to more Fed officials scheduled to speak this week. According to Matt Simpson, senior market analyst at City Index, they are likely to reiterate Powell’s message that further interest rate hikes remain possible.

A hawkish interpretation of CPI data, suggesting further interest rate hikes, will likely strengthen the U.S. dollar. In contrast, a dovish interpretation, indicating fewer rate hikes, could weaken the dollar by lowering U.S. Treasury yields.

This week’s outlook for yen

The Japanese yen weakened to a fresh one-year low against the dollar on Monday following the dollar. The yen briefly touched 151.78 yen against the greenback, but it has dropped to 151.84 as of writing.

“If one of the economic data releases this week shows strong inflation, it would likely push the dollar-yen exchange rate to the 152 range,” said market analyst Tony Sycamore.

As the pair approaches a crucial resistance level, DailyFX cautioned traders about the possibility of intervention by the Bank of Japan (BoJ) to curb speculative trading and stabilize the yen.

DailyFX analysts believe that if the Japanese authorities intervene in the FX market, the USD/JPY pair could rapidly fall below 150.90 and reach 149.00.

If the selling pressure persists, the next support level to watch would be 147.25. However, if the BoJ refrains from intervening and allows the exchange rate to surpass 152.00, analysts predict a rally toward 153.40, the upper boundary of a medium-term rising channel.

Data released on Monday in Japan indicated that wholesale inflation slowed below one percent for the first time in just over two and a half years. This suggests that the cost pressures driving up prices are beginning to subside, providing little support for the yen.

Amidst rising prices, the BoJ revised its inflation forecasts at its October monetary policy meeting. This move came as markets remained vigilant for indications that the bank might be nearing its exit from its ultra-loose monetary policy.

Elsewhere, sterling remained steady at $1.2235 against the dollar, anticipating the release of U.K. average weekly earnings data on Tuesday and a CPI reading on Wednesday. This comes after gross domestic product data released last week revealed that the economy had failed to grow. Meanwhile, the euro held around $1.0690.