The U.S. CPI data is about to be released, and the dollar shows bullish signals

The Zhitong Finance APP noted that at the beginning of this quarter, the US dollar has been stronger. There are signs that traders are preparing for further bullish momentum for the dollar, although US consumer price data will be delayed this week.

This month, the dollar has strengthened against almost all major currencies, partly due to safe-haven buying driven by concerns over credit in US regional banks. As the dollar rises, official US economic data has been blank since the government shutdown on October 1.

The absence of economic data has made the market more focused on the consumer price index (CPI) for September, which will be released on Friday, especially with the Federal Reserve set to hold a meeting next week. Economists expect the year-on-year increase in September CPI to be 3.1%, the highest level since May 2024. Although hot data is not expected to prevent policymakers from cutting interest rates on October 29 and possibly again in December, it may influence their policy stance as they enter next year.

Brent Donnelly, president of Spectra Markets, wrote in a report on Wednesday: "Given that the market has fully priced in two rate cuts by the Federal Reserve, the risks of the CPI data are asymmetrically skewed to the upside, and the asymmetry of capital flows from now until the end of the month will favor buying dollars." He suggested going long on the dollar in the next two weeks.

In October, the dollar rose against almost all major currencies.

In Donnelly's view, the risk of a higher CPI reading is greater. One reason is that the Canadian inflation data released this week exceeded expectations, which he believes indicates that US data may also show unexpected upward movement.

Decline in 2025

The Bloomberg Dollar Spot Index was little changed on Wednesday, up about 0.4% so far this week. However, the index is still down about 7% this year, on track for its worst annual performance since 2017.

The dollar weakened significantly in the first half of this year due to widespread tariffs imposed by then-President Trump, which disrupted the market and led investors to speculate on avoiding US assets, thereby weakening the dollar's safe-haven status. It has proven that despite signs of foreign investors hedging dollar positions, they are still pouring into US stocks and government bonds.

Given that the Federal Reserve will continue to ease policy in the face of signs of weakness in the US labor market, the dollar has also lost some of its appeal.

Jane Foley, head of foreign exchange strategy at Rabobank, said on Wednesday: "All the weakness in the dollar this year has indeed occurred in the first five months. Since then, I keep finding myself saying 'the dollar is not weak; it has been one of the better-performing currencies.'"

Options traders have also become more optimistic about the dollar. The three-month risk reversal indicator of the Bloomberg Dollar Spot Index has leaned towards bullish readings this month, with traders favoring call options that bet on the dollar strengthening over the next three months

Standard Chartered Bank G10 foreign exchange research global head Steven Englander expects that as the dollar rebounds comprehensively, the euro will fall from the current approximately 1.16 USD to 1.12 USD by mid-next year. One reason is that he believes there is limited evidence of capital fleeing the dollar.

Englander wrote in a report on Wednesday: "The market underestimates the risk of a dollar rebound. We believe the Federal Reserve's room for interest rate cuts is smaller than the market expects, so the dollar may receive support from interest rates."