Dollar edges higher ahead of key CPI release

By Peter Nurse – The U.S. dollar edged higher in early European trade Monday, trading close to a five-week high ahead of the week’s keenly-awaited U.S. inflation data, which could provide more clarity about the Federal Reserve’s rate hike path. 

At 03:05 ET (07:05 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% higher at 103.640, not far removed from last Tuesday’s high of 103.96, the strongest level since Jan. 6.

Tuesday sees the release of the latest U.S. consumer price index, which is expected to show that monthly rates ticked up in January, but the annual measures declined.

Traders appear to be favoring the greenback protectively ahead of the CPI report, after revisions to the previous data set showed consumer prices rose in December instead of falling as previously estimated. Friday’s University of Michigan survey also showed a one-year inflation outlook above January’s final number. 

A strong inflation print could force markets to rethink whether the Fed will actually cut rates this year, particularly after the strong jobs report earlier in the month.

The dollar has also benefited from its safe haven status as the U.S. shot down a fourth object over North America over the weekend, raising fears of further geopolitical tensions after a Chinese spy balloon was shot down last week.

Elsewhere, USD/JPY climbed 0.6% to 132.13, with the yen handing back a lot of Friday’s gains after speculation linked academic Kazuo Ueda to the role as the next governor of the Bank of Japan.

Ueda had been seen as something of an outsider who could change the central bank’s current ultra-easy policy, but this optimism has been diluted ahead of Tuesday’s announcement after he expressed support for the central bank’s current position.

EUR/USD traded flat at 1.0675, not far removed from Monday’s five-week low of 1.0656. The European Commission is set to release quarterly economic forecasts for the euro area on Wednesday, and the Eurozone is to release revised GDP data on Tuesday.

GBP/USD fell 0.1% to 1.2049, remaining weak after data released Friday showed that while the U.K. narrowly avoided a technical recession in the final quarter of 2022, gross domestic product still fell 0.5% on the month in December.

USD/CNY rose 0.3% to 6.8299, with speculation mounting that the Chinese authorities will further ease monetary policy to try and generate growth as the country emerges out of its strict anti-COVID measures.