FX.co ★ US dollar in tactical retreat ahead of inflation data release

The US dollar's recent performance suggests that USD could be in tactical retreat, which confuses market players who expect the dollar to strengthen further.

Currency strategists at JPMorgan Chase believe that the ongoing upward correction of EUR/USD would, in fact, give support to the US dollar. They expect a USD upsurge in autumn which would likely continue into winter. The current USD upsurge depends on several factors, such as positive US macroeconomic data, intensifying economic issues in the EU and falling Asian exports.

The US dollar appear to be getting ready for a big jump that could happen if US inflation data turn out to be positive. US CPI data for August will be published on Tuesday, September 13. Inflation is expected to decrease to 8.1% from 8.5% in July. However, it would still greatly exceed the target level of 2%. Wells Fargo analysts see CPI decrease by 0.2% amid falling gasoline prices.

July's CPI data unexpectedly decreased, pushed down by falling energy prices, as well as declining prices of services and essential goods. "We expect Tuesday's report to show consumers received further relief on the inflation front in August," analysts at Wells Fargo said.

In the meantime, the US dollar weakened slightly, giving the euro a chance to advance. However, this could be a short-term retreat, experts say. EUR/USD hovered around 1.0142 on Tuesday after rising on Monday amid hawkish comments by ECB policymakers on interest rates.

EUR/USD continued its rally after forming a bullish gap at the beginning of the week. The pair peaked at 1.0200, its highest level since mid-August, but retreated afterwards. Technical data suggests that EUR/USD would remain in a bullish trend in the near future.

The US dollar is currently slowly stabilizing as market players are focused on upcoming inflation data. USD tried to recoup its losses, despite the EUR rally fuelled by hawkish comments by ECB policymakers.

The US CPI data for August would be particularly important in the run-up to the FOMC policy meeting, which is scheduled to take place on September 20-21. Although inflation is shown signs of easing, market players expect the Fed to accelerate the pace of monetary tightening. 88% of analysts expect a 75 basis point rate hike, taking the federal funds rate to a range of 3.00% to 3.25%.

The FOMC is constantly focused on the level of inflation and its pace. The upcoming CPI data would be a decisive factor for Fed policymakers when making decisions on the regulator's monetary policy. The Fed is also ready to release updated outlooks for the US economy.

However, core consumer prices in the US remain well above the Fed's target level of 2%. Inflation is expected to decline in the near future thanks to easing supply chain pressures and falling commodity prices over the past several months. However, the high pace of salary increases could keep inflation from falling. Pushing inflation down to the target level of 2% and keeping it there for a long time would be a very difficult task, experts say.