Investing.com — Sterling and the euro held near flat on Wednesday as currency markets entered a deliberate holding pattern ahead of today’s US May CPI release, the data point that will determine whether the dollar’s six-week recovery has further to run or faces its first meaningful pullback.
As of 08:30 ET (12:30 GMT), traded higher by 0.12% at 1.3396, while slipped 0.06% to 1.1551, with both pairs effectively treading water as participants position ahead of the afternoon’s inflation print rather than commit to fresh directional moves.
The dollar is holding last week’s gains as markets brace for headline CPI to break above 4% YoY for the first time since May 2023, with core expected at 0.3% MoM and 2.9% YoY.
A reading in line with consensus would cement December Fed hike pricing and keep the bid toward ING’s 100.40/50 target into next week.
The broader backdrop is the accelerating unwind of last year’s dollar debasement trade.
US real rates have risen 60bp over six weeks as the market concludes the Fed will respond to this year’s inflation shock, drawing $99 billion into USD money market funds last week, the highest weekly inflow of the year, while punishing , and the . Watch $4,100/oz in gold and $60,000 in bitcoin for signs of further capitulation.
The downside risk is a soft core print. Continued pressure on rents could drag the monthly reading to 0.2%, allowing DXY to test the 99.50/60 area.
ING treats this as the tail scenario; Thursday’s PPI and next week’s FOMC should keep the dollar bid on dips regardless.
Sterling’s resilience at 1.3385 reflects the absence of domestic catalysts rather than any positive fundamental shift.
The Bank of England remains sidelined, with markets pricing only around 21bp by September. Sterling’s pro-risk character provides a marginal buffer while equities hold, but a hot CPI print and subsequent equity sell-off would expose the pair quickly.
ING’s 1.3300 target this week remains intact, with 1.3200 in view if dollar momentum resumes.
EUR/USD is navigating a narrow corridor, capped at 1.1575 with 1.1500 as critical support. Today is entirely subordinate to CPI, but tomorrow’s ECB meeting carries the greater risk. A 25bp hike is priced; what matters is whether the Governing Council leaves July open.
The market expects no back-to-back hikes, meaning any hawkish signal could provide a short-term lift to the euro, but the pair must clear today’s data hurdle first.