**U.S. Dollar Strengthens Ahead of Key Inflation Data: Market Outlook for Major Currency Pairs**
By: Vladimir Zernov (Adapted and Expanded)
The U.S. dollar saw upward momentum on Monday as investors showed a cautious yet optimistic stance ahead of the critical Consumer Price Index (CPI) inflation report due later in the week. Market participants focused their attention on economic indicators that could provide clues on the direction of Federal Reserve monetary policy, with many anticipating signs of persistent inflation that may delay interest rate cuts.
The anticipation of inflation data helped support the U.S. Dollar Index (DXY), which measures the greenback’s performance against a basket of major currencies including the euro, British pound, Japanese yen, and Canadian dollar. At the time of reporting, the DXY rose to 104.8, signaling renewed bullish interest in the U.S. currency.
This article will explore various forex pairs including EUR/USD, GBP/USD, USD/JPY, and USD/CAD, while examining the broader macroeconomic drivers influencing dollar strength.
## U.S. Dollar Gains Traction Before Inflation Print
After last week’s stronger-than-expected U.S. labor market data—highlighted by the April nonfarm payrolls report and revisions to past months—investors began recalibrating expectations for when the Federal Reserve might initiate rate cuts. The jobs report showed that the U.S. economy added 272,000 jobs in May, well ahead of expectations for around 180,000. This added fuel to speculation that the Fed may keep interest rates elevated for longer than previously anticipated.
As a result, the likelihood of a September rate cut dropped considerably, with CME FedWatch Tool data showing that markets are now pricing in a greater than 50% chance the Fed might hold rates until November or December.
Upcoming inflation data holds the key for confirming or contradicting this expectation. The CPI report, set for release on June 12, will be closely watched for signs of cooling price pressures. Core CPI, which excludes volatile food and energy prices, is particularly important as it serves as a better barometer of underlying inflation trends.
If CPI comes in hotter than expected:
– The U.S. dollar could experience further upside.
– Expectations of a Fed rate cut could be pushed further into the future.
– Treasuries may sell off, leading to higher yields and increased demand for the dollar.
Conversely, cooler inflation may revive discussions of a policy pivot and weigh on the dollar.
## EUR/USD: Facing Downward Pressure Near 1.0730
The euro struggled to maintain recent gains and traded within a narrow range around 1.0730 against the U.S. dollar on Monday. Traders took a cautious tone following the European Parliament elections, where far-right parties made impressive gains in countries like France and Germany, increasing political uncertainty within the bloc.
Key factors influencing the pair include:
– The European Central Bank (ECB) delivered a 25-basis-point interest rate cut on June 6, becoming the first major central bank to initiate a monetary policy easing cycle in 2024.
– ECB President Christine Lagarde emphasized data dependency and did not commit to a consistent path of rate cuts, signaling that any further moves will depend on inflation trends and economic resilience.
– German industrial production tumbled by 0.1% month-over-month in April, pointing to Europe’s continued struggle with sluggish manufacturing output.
The subdued macroeconomic outlook within the eurozone coupled with political uncertainty is keeping pressure on EUR/USD.
Outlook:
– Support is seen near 1.0700, where previous buying activity was concentrated in late May.
– Resistance is located around 1.0780, aligning with a descending trendline from highs seen earlier in the year.
– Continued U.S. data strength threatens to push the euro below 1.0700, potentially targeting 1.0650 in the near term.
## GBP/USD: Consolidating Below the 1.2730 Hurd
Read more on USD/CAD trading.