By Rania Gule Market Analyst at XS.com

The Dollar Index (DXY) has recently experienced modest losses, trading at 102.24 points during Thursday’s sessions. The market remains cautious ahead of the release of U.S. inflation data amid relatively quiet trading. The focus is primarily on the release of the U.S. Consumer Price Index (CPI) for December today.

Currently, the markets anticipate five interest rate cuts in 2024, significantly deviating from the Federal Reserve’s expectation of only 75 basis points of easing. Strong U.S. labor market data has largely offset this disparity, particularly considering the weak U.S. Purchasing Managers’ Index (ISM) reading. Therefore, the December Consumer Price Index reading is expected to play a significant role in shaping the Fed’s expectations for future monetary easing.

Inflation data could lead to a market repricing of the Federal Reserve’s interest rate cuts later this year, resulting in significant volatility in the short and medium term for the U.S. Dollar Index. So, what can be expected in the upcoming Consumer Price Index report?

The U.S. Consumer Price Index is expected to rise at an annual pace of 3.2% in December, slightly faster than the 3.1% increase recorded in November. Additionally, inflation in the Core Consumer Price Index, which excludes volatile food and energy prices, is expected to decrease to 3.8% during the same period, compared to the previous growth of 4.0%.

The monthly Consumer Price Index and Core Consumer Price Index are also expected to increase by 0.2% and 0.3%, respectively. Therefore, it can be said that core inflation will decrease significantly, but monthly inflation will rise strongly by 0.1%, supporting the strength of the dollar in the short and medium term.

From my perspective, inflationary pressures are unlikely to be alleviated by a decline in energy prices this time. The report is likely to show that the goods sector remains a significant obstacle to core inflation. At the same time, the housing market is expected to remain stable, potentially supporting the strength of the dollar.

While Federal Reserve officials maintain their data-dependent stance on monetary policy, inflation data in the U.S. Consumer Price Index holds the key to measuring the timing and pace of interest rate cuts by the Federal Reserve, which could significantly impact the value of the U.S. Dollar Index.