Dollar trades solidly in calm before CPI storm

August 10, 2022: The dollar traded firmly on Wednesday in anticipation of U.S. inflation data, which even if it comes in softer than expected is still likely to be so red hot that steep U.S. interest rate rises will be required to rein it in.

The figures are due at 1230 GMT. Economists expect year-on-year headline inflation to run at a scorching 8.7%, a small retreat from June's whopping 9.1% figure. Core inflation is expected at 0.5% month-on-month .

Currency market moves have been slight in the lead-up and for previous releases, reactions have been more muted than in the volatile bond market. The greenback was broadly steady overnight, though has paused a bit of a retreat that began in the middle of July.

It bought 135.14 Japanese yen and sat at $1.0208 per euro . The Australian and New Zealand dollars eased slightly, with the Aussie last at $0.6958 - just above its 50-day moving average. The kiwi bought $0.6284.

Traders expect the reaction to turn on the core inflation figure.

"The market will initially get more excited by a downside core CPI surprise than an upside surprise," said Deutsche Bank strategist Alan Ruskin, feeding into hopes that falling commodity prices mean inflation can quickly recede.

"It will also play to the market's recent proclivity to buy risk dips, and will be a broad-based negative for the U.S. dollar," he said.

"An upside core CPI surprise will fit with the pattern of the last three releases...the purist long dollar trade in this instance is versus the yen," he said, adding dollar/yen could likely rise into a 135-139 per dollar range.

A quick reading on policymakers' reaction may come from Fed officials Charles Evans and Neel Kashkari who are due to make speeches at 1500 GMT and 1800 GMT, though they will have another set of price data in August before September's policy meeting.

"A one-off sharp drop in CPI at this point should not mean that much to the Fed," said NatWest Markets' rates strategist Jan Nevruzi.

"They need to see at minimum a consistent multi-month trend to turn around, while acceleration in inflation means that a lot more has to be done on the tightening front."

Chinese inflation data is also due on Wednesday, though is expected to show it is firmly under control. The yuan has faced some pressure from rising Sino-U.S. tensions and a widening property and banking crisis in China.

In offshore trade, the yuan was steady at 6.7550 per dollar.

Bitcoin , rattled by a drumbeat of cryptocurrency fund wipeouts and thefts over recent months, fell sharply on Tuesday and was at $23,070 on Wednesday.

In emerging markets, the Bank of Thailand is expected to lift interest rates from record lows and the baht hung on to recent gains.

Reuters