US Dollar Faces Make-or-Break CPI Test at 200-Day Average

The US dollar is trading within half a percent of its 200-day moving average, with Wednesday's CPI release set to decide whether the Fed hikes in September.

The US dollar is within half a percent of its 200-day moving average, with Wednesday's consumer price index set to shift the odds of a September Federal Reserve rate hike that markets price at roughly 50/50.

"A stronger-than-expected inflation report will raise the possibility that the Fed will hike interest rates later this year," Beth Hammack, president of the Federal Reserve Bank of Cleveland, said Monday.

The dollar basket, or DXY, traded just below 100, with support at 99.2 at the daily 200-day simple moving average. The pound bought $1.3507, down 0.03 percent, the euro fetched $1.1537, off 0.08 percent, and the dollar rose 0.06 percent against the yen to 159.22. Brent crude held near $84 a barrel after ending Friday around $83.55, with West Texas Intermediate above $78.

A soft CPI reading would likely test that 99.2 support and push the dollar lower, while a hot print would strengthen the case for a September hike and lift the greenback. The release lands after Friday's nonfarm payrolls report showed the economy shed 23,000 jobs in July, missing the 85,000 gain economists expected, with wage growth of just 0.1 percent against a 0.3 percent forecast.

The July CPI report is expected to come in soft, with headline month-on-month inflation estimated at 0.1 percent, helped by lower oil prices, and core at 0.2 percent. Inflation data has been volatile since the Middle East conflict began, though readings have not been as bad as feared. The soft wage print matters because it suggests the energy spike is not feeding into a wage-price spiral of the kind that drove inflation sharply higher in 2021-2022.

Rate Differentials Hinge on Wednesday's Print

The dollar's direction this week hinges on whether inflation confirms the cooling shown by the jobs report. The US has added more than 716,000 jobs since President Donald Trump took office, compared with more than two million in the final two years of Joe Biden's presidency, a slowdown that has eased pressure on the Fed to tighten. Stocks rallied Friday on the weak payrolls data, with the S&P 500 closing at a record high as rate-hike fears receded.

For the pound, the CPI release coincides with UK GDP, industrial and manufacturing production data that will shape Bank of England expectations. Sterling rose to $1.3510, its highest since July 16, and has formed an inverted head-and-shoulders pattern above its 50-day moving average, with bulls targeting the May 1 high of $1.3652, according to technical analysis from DailyForex.

Geopolitics Keeps Oil Elevated

Geopolitical risk continues to underpin oil and inflation concerns. Iran said a deal with Oman to define new shipping lanes was in its final stages but insisted the Strait of Hormuz would fully reopen only after the United States met conditions including ending the naval blockade of Iranian ports, lifting sanctions and releasing frozen assets. President Trump said Sunday the US was "low-keying" the situation and relying on economic pressure rather than military escalation.

The last time the dollar traded this close to its 200-day average with a CPI release pending, the subsequent print drove a move of more than 1 percent in the DXY within a week. If Wednesday's data comes in hot, the September hike odds could swing decisively above 50 percent, lifting the dollar and pressuring risk assets; a cool reading would likely push the greenback through 99.2 and open the door to a test of lower levels.

This article is for informational purposes only and does not constitute investment advice.