Inflation peaks as Dollar Index regains strength

The dollar index has reclaimed its bullish momentum over-optimistic bets on the CPI report to be released tomorrow. The bulls are hoping for a reduction in the inflation rate from the CPI report to be released tomorrow.

Analysts are predicting more upside movement for the dollar index (USDX) ahead of the CPI report to be released tomorrow. The CPI report is essential data that measures the inflation rate in the US economy in the previous month. Inflation has been a significant factor upsetting the forex market for most of the year.

The rising inflation rate has caused the Fed to take aggressive positions in hiking the interest rate for the US dollar for four consecutive months. The Fed had further placed its readiness to continue with this aggressive interest rate hike in their subsequent sessions should the inflation continue. The climax of the US inflation was seen in June US attaining four decades high in June at 9.1%. The Fed responded by hiking the interest rate for the US dollar by 75 basis points in July.

The primary cause of the US inflation has been the high cost of oil caused by the limitations in oil supply due to the Russian-Ukraine wars. Russia has reduced its oil supply rate to Europe and other countries that have hitherto depended on Russian oil. This has increased the demand for oil in the first and second quarters of the year, thereby skyrocketing oil prices to a new all-time high.

The headline for high energy prices proved different in July. Thus, oil prices remained lower in the past month up till the present moment. This has given investors high hopes that inflation has been contained.

The market is hoping for a slowdown in the inflation rate from the CPI report to be released tomorrow.

Reducing the inflation rate will favour the US dollar and strengthen the dollar index. The bulls seem to be again taking positions in pushing the dollar index higher above the new support at 106. The upward trend is expected to continue long-term, especially if tomorrow’s CPI report comes out lower than forecasted.

What are the dollar index (USDX) and CPI reports?

The dollar index is an essential financial instrument that measures the strength of the US dollar against other currency pairs in the market today. It weighs the dollar’s performance against the six major currencies: the British pound, euro, Japanese yen, Swiss franc, Swedish krona, and Canadian dollar. The dollar index is often abbreviated as USDX or DXY. Today, it is listed among the tradable indices’ pairs in the forex market.

The Consumer Price Index (CPI) is an important economic data that measures the change in the price of goods and services delivered to consumers. This data is obtained by sampling various products’ current prices and comparing them with those of the past month. Very often, investors pay great attention to the reading from the CPI report as it is used in measuring the inflation rate.

How does the CPI report influence the dollar index?

The CPI report bears much influence on the dollar index. Thus, rising inflation from the CPI reading often caused the Fed to hike the interest rate for the dollar aggressively. In contrast, a reduction in the CPI opens the path for growth for the dollar index. Often investors looked up to the CPI report to assist them in deciding whether to long or short the dollar index.

The forecast for this data is 0.2%, while the previous reading was 1.3%.

Forecast

Many analysts today believe that the dollar index has peaked and expect a massive reduction in the inflation rate in the CPI report to be released tomorrow. The reason for this is the enormous decline in oil prices witnessed throughout July up until the present. The primary cause of the high inflation rate in the US economy had been dependent on high energy prices due to limitations on oil supplies as a result of the Russian-Ukraine wars.

However, the high prices of oil have curtailed. The demand reduced significantly in the past month up till the present. This is expected to impact significantly on the inflation rate, possibly reducing it to a lower point. The inflation report for July is expected to slow down to about 8.1% against the previous record of 9.1% recorded in June. The core CPI excludes food and energy costs and is also expected to slow down.

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