US Dollar Index (DXY) flat lines below mid-98.00s as traders await US inflation data

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USD struggles to attract any follow-through buying amid dovish Fed expectations.
Traders also seem reluctant to place aggressive bets ahead of the US CPI report.
The recent breakdown below the 200-day SMA warrants some caution for bulls.

The US Dollar Index (DXY), which tracks the Greenback against a basket of currencies, struggles to build on the previous day's modest recovery gains and oscillates in a narrow band during the Asian session on Thursday. The index is currently placed just below mid-98.00s, nearly unchanged for the day, as traders opt to wait for the US consumer inflation figures before placing fresh bets.

The crucial US Consumer Price Index (CPI) is due for release later during the North American session and will be scrutinized for cues about the Federal Reserve's (Fed) future policy path. This, in turn, will play a key role in determining the next leg of a directional move for the buck. Heading into the key data risk, dovish Fed expectations keep the USD bulls on the defensive and act as a headwind for the index.

Despite the Fed's cautious outlook, traders have been pricing in the possibility of two more interest rate cuts in 2026 amid visible signs of a softening US labor market. Adding to this, speculations that the new Fed chair will be dovish and slash interest rates further amid political pressure. In fact, US President Donald Trump said on Wednesday that the next Fed chief will be someone who believes in lower interest rates by a lot.

However, Federal Reserve Governor Christopher Waller – one of five finalists to potentially succeed Jerome Powell – said that he will absolutely emphasize the importance of central bank independence to President Trump. This, in turn, offers some support to the USD. Nevertheless, the broader fundamental backdrop seems tilted in favor of bears and suggests that the path of least resistance for the USD is to the downside.

Even from a technical perspective, the recent breakdown and the overnight failure near the very important 200-day Simple Moving Average (SMA) validate the near-term negative outlook for the Greenback. Hence, any subsequent move up might still be seen as a selling opportunity, warranting some caution before positioning for an extension of the USD's recovery from its lowest level since early October.

Economic Indicator

Consumer Price Index (YoY)

Inflationary or deflationary tendencies are measured by periodically summing the prices of a basket of representative goods and services and presenting the data as The Consumer Price Index (CPI). CPI data is compiled on a monthly basis and released by the US Department of Labor Statistics. The YoY reading compares the prices of goods in the reference month to the same month a year earlier.The CPI is a key indicator to measure inflation and changes in purchasing trends. Generally speaking, a high reading is seen as bullish for the US Dollar (USD), while a low reading is seen as bearish.

Why it matters to traders?

The US Federal Reserve (Fed) has a dual mandate of maintaining price stability and maximum employment. According to such mandate, inflation should be at around 2% YoY and has become the weakest pillar of the central bank’s directive ever since the world suffered a pandemic, which extends to these days. Price pressures keep rising amid supply-chain issues and bottlenecks, with the Consumer Price Index (CPI) hanging at multi-decade highs. The Fed has already taken measures to tame inflation and is expected to maintain an aggressive stance in the foreseeable future.