Dollar inches up but volatility limited ahead of U.S. data

by Jonathan Adams
Dollar Index

The Dollar Index, which tracks the greenback against a basket of six other currencies, rose less than 0.1% at 90.093

The dollar clung to marginal gains in early European trade Wednesday, but volatility was limited with traders awaiting upcoming U.S. inflation data and an European Central Bank (ECB) meeting for clues about future central bank policy.

At 0755 GMT, the Dollar Index, which tracks the greenback against a basket of six other currencies, was up less than 0.1% at 90.093.

EUR/USD was 0.1% higher at 1.2178.

The dollar has been on a downtrend for much of the last year, but investors are starting to get nervous that rampant inflation could force the Federal Reserve to taper back its ultra easy monetary policies earlier than previously guided. This would result in rising interest rates and a more buoyant greenback.

Earlier Wednesday, China’s factory-gate prices climbed in May to their highest level since 2008 driven by surging commodity prices, rising 9.0% year-on-year (YOY) in May, a considerable leap from the 6.8% growth during the previous month.

Consumer prices also rose for the third month in a row, increasing 1.3% year-on-year (YOY) in May, up from 0.9% gains during the previous month, and the Chinese yuan rose as a result, with USD/CNY dropping 0.1% to 6.3953.

This sets the scene for Thursday’s release of U.S. consumer price data, one of the last major pieces of economic data before the next Fed meeting on June 15-16.

We see clear risks of a big positive surprise to the May inflation report as well with core inflation around or just above 4%. The market is still buying the transitory inflation narrative but for how long, said analysts at Nordea, in a note.

Thursday also sees the latest policy decision by the ECB, with the central bank widely expected to keep in place its ultra-loose monetary policies given the region has yet to generate inflation at anything like the levels seen in the U.S.

That said, the euro is likely to be sensitive to changes in the bank’s economic forecasts or any signal that the pace of bond buying could be reduced in months ahead.

This article is for information purposes only.
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