USD firmed slightly against most of its major rivals in the European session on Monday as investors looked for tomorrow's release of the U.S. consumer price index (CPI) for January, hoping to receive additional clues about a potential start to the Federal Reserve’s monetary policy easing cycle.
The U.S. Dollar Index (DXY), measuring the U.S. currency's value relative to a basket of foreign currencies, inched up 0.04% from the previous close to 104.15.
The U.S. January CPI report is set to be published on Tuesday at 1330 GMT. Expectations are for it to show a moderation in the headline inflation rate to 3.0% YoY from 3.4% YoY in December and a slight deceleration in the core inflation rate to 3.8% YoY from 3.9% YoY.
The U.S. central bank's officials, including its chairman Jerome Powell, continue to highlight the need to see more evidence that inflation is going sustainably back to the 2% target before beginning the process of interest rate reduction.
If tomorrow’s data come in significantly different from expectations, this could alter markets’ views on the Fed's rate path.
Last week's U.S. data releases, featuring a further expansion in services sector activity in January and a decline in the number of claims, as well as hawkish remarks from the Fed officials, signalling they are not in a hurry to ease monetary policy stance this spring, caused a repricing of rate cut bets.
According to the CME FedWatch Tool, the probability of a 25 basis points rate reduction by the Fed to 5.00-5.25% at the May meeting is now estimated at 60.9%, down from 62.3% one week ago, and the probability of the move in June is seen at 94.4%, down from 94.7% one week ago.
Overall, markets are pricing in five cuts this year, while the Fed policymakers’ projections imply only three moves.