US Dollar retreats ahead of important US economic data point

• US Dollar heads lower as China’s central bank cuts one of its benchmark rates.
• Traders are pre-positioning for US inflation numbers, reducing their long- US Dollar positions. 
• US Dollar Index holds just above 103.25 and forms a double bottom with the low of Monday.

The US Dollar (USD) is being sold again against most of its peers as most notable losses for the Greenback are against Korean Won – down 1% intraday – and UK’s Pound Sterling – down 0.60%. The weaker USD has been influenced by a surprise rate cut by China People’s Bank Of China (PBOC) cutting its 7-day Reverse Repo rate to 1.9% from 2% and committing to further stimulus for the much-battered construction sector. Additionally to the move, traders are reducing a bit of risk against the Greenback, maybe anticipating a lower-than-expected US Consumer Price Index (CPI) inflation print later in the trading session. 

For that US CPI release, the market is expecting a drop on all fronts, with the most notable being the headline CPI YoY figure, which is set to drop from previous 4.9% to 4.1%, according to market consensus. Lowest estimate for that number is 4.0% while the highest estimate is for 4.3%. Expect to see a big move downward in the US Dollar Index should the actual number come out at 4.1% or lower. An inverse result of course should US CPI come out at 4.3% or higher, the US Dollar would rally higher in the likelihood that the Fed will need to do more rate hikes than projected at the moment. 

Daily digest: US Dollar facing its first big data point with US CPI

• US Consumer Price Index numbers are set to come out on Tuesday at 12:30 GMT, with headline and core figures for monthly and annual prints. Overall CPI MoM expected at 0.2%, coming from 0.4%, while the YoY is expected to fall from 4.9% to 4.1%. The core inflation MoM should remain steady at 0.4% while YoY drops from 5.5% to 5.3%. 
• The Federal Open Market Committee (FOMC) is set to start its two-day meeting where Federal Reserve board voters will make a rate decision announced on Wednesday. 
• The US Treasury will head to markets again to allot a 30-year and 1-year bond auction. 
• China weighs broader stimulus with property support and more rate cuts after it announced a rate cut in its 7-day Reverse Repo Rate from 2.0% to 1.9%.
• US equity futures rallied substantially on Monday and the party does not look to be over. All major indices in Asia and Europe are in the green while US equity futures are firmly in the green again. Japan’s Nikkei prints even a 33-year high. 
• The US Treasury had to pay a higher yield in order to get its auction allocated in the market on Monday evening. The yield came out at 3.791%, while 3.776% was expected. 
• The CME Group FedWatch Tool shows that markets are pricing in a 27% chance of rate hike for June and an 87% chance for a hike in July. A few market participants still believe that should US CPI surprise to the upside, the Fed could still go for a 25bp hike on Wednesday. 
• The benchmark 10-year US Treasury bond yield trades at 3.73%. Steady for now after the whipsaw move on Monday with the 10-year Treasury yield moving from 3.72% to 3.8% before closing at 3.74%. 

US Dollar Index technical analysis: USD bears focused toward that break below 103

The US Dollar is showing further signs of weakening as almost every currency in the Dollar Index (DXY) is gaining traction against the Greenback. That floor at 103 really comes close now and could see a firm break on the back of the US CPI numbers later this Tuesday. 

On the upside, 105.44 (200-day SMA) still acts as a long-term price target to hit, as the next upside key level for the US Dollar Index is at 105.00 (psychological, static level), and acts as an intermediary element to cross the open space.

On the downside, 103.02 (100-day SMA) aligns as the first support level to confirm a change of trend. In the case that breaks down, watch how the DXY reacts at the 55-day SMA at 102.55 in order to assess any further downturn or upturn.