Dollar Direction Debate Heats Up Ahead of Inflation, Powell

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By Yasin Ebrahim

AiVIF.com – The dollar inched higher Monday, but the debate on whether doom or glory awaits the greenback continues to heat up ahead of a busy week that could provide fresh clues on inflation and Federal Reserve monetary policy.

The U.S. dollar index, which measures the greenback against a trade-weighted basket of six major currencies, rose by 0.15% to 92.26.

June CPI due Tuesday is expected to show inflation grew at 0.4%, slower than the 0.7% in May.

The expected slowing of inflation in June, however, has dividend opinion on what it means for the fate of the dollar.

Some suggest easing price pressures may force traders to ease bets on the Federal Reserve tightening monetary policy sooner than expected. While others believe the market could be in for a hawkish surprise from the Fed.

“In the US, CPI data tomorrow will tell us whether we did indeed see the peak in inflation in May […] potentially putting a cap on Fed rate expectations for now,” ING said in a note.  “The dollar, whose rally lost steam late last week, may see bullish bets continue to ease on the back of that and also as the market now appears less in a rush to unwind its reflationary trades.”

But some on Wall Street have cautioned against betting that this is the beginning of the end for reflation, and point out that investor expectations for the Fed policy to remain supportive for longer are likely overdone.

“[W]e do not believe that the Fed can be counted on to be as dovish as many in the market assume, given the willingness of FOMC participants to raise the dots representing the federal funds rate in line with their higher projections for inflation,” it added. “We continue to recommend a long USD view, both against G10 and EM currencies.”

The sustained period of inflation will need the supportive backdrop of a growing economy supported by an improving labor market. “In order to see sustained inflation expectations increase, we need better jobs numbers and better growth,”  George Cipolloni a portfolio manager of Penn Mutual Asset Management said in an interview with AiVIF.com on Monday.

Fed Chair Jerome Powell’s semi-annual testimony to Congress on Wednesday and Thursday, could offer further insight into the central bank’s thinking on monetary policy at time when there appears to be a lack of cohesion on when the trimming of bond purchases should get underway.