The Dollar Failed to Strengthen on Higher Inflation

The currency market has stabilized following the release of January inflation data in the United States. The U.S. Dollar index (DXY) is hovering around 104.30 points, while the EURUSD remains unchanged at 1.07700.

Last week's inflation data in the U.S. exceeded expectations, indicating a monthly acceleration in prices. This suggests renewed inflationary pressures that may lead the Federal Reserve (Fed) to maintain its interest rates unchanged in March and May. Bets on interest rate cuts declined to 8.5% and 32.9%, according to the CME FedWatch Tool. The possibility of interest rate cuts in June is also in question, with a 52.7% probability.

Despite the bold reason for the U.S. Dollar to strengthen, it experienced only a 0.7% rise on the news last week. The EURUSD temporarily dipped to 1.06940 last Wednesday but recovered to 1.07760 by the end of the week. The WisdomTree Bloomberg U.S. Dollar Bullish Fund (USDU) reported net capital outflows of $5.2 million, extending overall net outflows to $20.1 million this year. Higher inflation did not convince investors to bet on the Dollar.

The Dollar may face challenges from statements by Fed officials this Wednesday and the subsequent release of FOMC Minutes. While the Fed is expected to support the Dollar, its impact may be short-lived. The release of February PMI indicators for the Eurozone, the United States, and the United Kingdom on the following day could exert downward pressure on the Dollar if readings meet consensus expectations.

As a result, the Dollar is likely to experience neutral or downward movement this week. From a technical perspective, both scenarios are equally possible. However, for the second scenario to materialize, the EURUSD needs to climb above the resistance at 1.07900-1.08300. The pair is currently slightly below this level but is attempting to break through. In the bullish scenario, the EURUSD may move towards 1.09000-1.11000.