The Dollar is Weakening ahead of Inflation Data Release

The U.S. Dollar is experiencing a decline, with its index (DXY) dropping by 0.3% to 103.68 points this week. Against the Euro, the EURUSD has edged lower by 0.3%, currently trading at 1.08620. The performance of the Greenback appears mixed when compared to other major reserve currencies.

The EURUSD is trading above the resistance level at 1.07900-1.08300, indicating a potential further upside. While the pair reached 1.08880 last week, it retreated after the release of mixed PMI data in both the Eurozone and the U.S. Nevertheless, the pair remains above 1.08000, a sign of strength. The ongoing uptrend this week may face a setback following the release of the January year-on-year PCE index, which is expected to show a slowdown. This could lead the Federal Reserve (Fed) to consider interest rate cuts.

Investors may be gearing up for a long-term strategy. The WisdomTree Bloomberg U.S. Dollar Bullish Fund (USDU) reported net capital inflows of $9.1 million last week, reducing net outflows to $11.0 million for the year. Increasing capital inflows suggest heightened activity in the currency market. If this trend continues, it could signal a positive sentiment for the Dollar in the spring. Investors are accumulating long positions for the Greenback even as it experiences a decline.

The strengthening of the Dollar could potentially begin with a stock market correction or Fed interest rate cuts. Currently, the American currency is in a retreat mode. Investors are awaiting PCE data in the U.S. and PMI indications in China, scheduled for Friday. Inflation and PMI numbers might bring surprises, with expectations of a decline in Manufacturing PMI and a potential increase in the Service sector. Strong readings could be perceived as a negative factor for the Yuan, indicating less stimulus from the Central government for the economy.

Navigating through macroeconomic data should be done cautiously in anticipation of increased market activity this spring. Both fundamental and technical signals may be unreliable. If the EURUSD can hold above 1.08300, it may continue its recovery towards the resistance at 1.09000-1.09200. A breach of this level could pave the way for further gains towards 1.10000-1.11000. This might present a favorable opportunity for larger investors to buy the Dollar, with targets set at 1.05000 for the EURUSD in the coming months.