ING’s Chris Turner notes the Dollar is holding recent gains as markets await the US May CPI report, with expectations that firm core inflation will keep Federal Reserve hike pricing alive into December. Rising US real rates have unwound last year’s Dollar debasement trade, pressuring Gold, Bitcoin and the Swiss Franc, while ING projects DXY drifting toward the 100.40/50 area.

Fed reaction to inflation shock underpins Dollar

"The dollar is largely holding onto its gains made last week. Equity markets remain very volatile as investors shuffle portfolios ahead of Friday's SpaceX IPO. Oracle is due to report earnings after the close today to provide the latest insight into the AI data centre buildout and its revenue opportunities."

"The highlight will be the release of the May CPI report, where headline inflation is expected to rise above the 4.0% YoY level for the first time since May 2023 and core CPI is expected to rise 0.3% month-on-month and 2.9% (2.8% prior) YoY. Assuming those levels are delivered, expect the market to continue pricing a Fed hike in December and the dollar to stay supported."

"Thus, a 0.2% instead of a 0.3% could be the risk on core CPI month-on-month today, which could see short-dated rates edge a little lower and the dollar soften. But a hot PPI print tomorrow and next week's FOMC should keep the dollar bid on dips."

"Keep an eye on key support levels in gold and bitcoin, such as $4100/oz and $60,000 for signs of more money leaving that trade and more money entering the dollar. And a higher USD/CHF looks to be a key vehicle in this debasement retreat."

"With continued upside risks to energy prices, we expect to see DXY remaining bid on dips. Any soft core CPI reading could see DXY test the 99.50/60 area, but the direction of travel looks to be the 100.40/50 area into next week."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)