Strong inflation data should support the Dollar, but any rally set to end early – Commerzbank

US inflation data and FOMC minutes might provide momentum for the Dollar today, Esther Reichelt, FX Analyst at Commerzbank, reports.

EUR/USD unlikely to break out of its 1.08-1.10 range on inflation data

“The higher inflation will be, the stronger arguments in favour of a further rate hike would be. Strong inflation data today should therefore support the Dollar accordingly, as a further rate hike is increasingly being priced in by the market but not completely yet. I would be surprised though if the inflation data would cause EUR/USD to break out of its 1.08-1.10 range today.”

“Whereas the Fed sees no scope for rate hikes this year the market expects lower Fed rates as early as the second half of the year presumably to counteract an excessive tightening of financing conditions. As today’s inflation rates are unlikely to affect this view any USD rally is likely to end early.”

“We do not assume that the discrepancy between Fed and market expectations will end today or in the near future. However, while it remains in place this results in significant risks for the Dollar. As our economists do not expect a rate cut for this year either we see potential for a setback in EUR/USD in principle.”

See – US CPI: Banks Preview, inflation softening, good news on the horizon?