The U.S. dollar is getting ready to break the range ahead of CPI
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The U.S. dollar is getting ready to break the range ahead of CPI

On Thursday, all major indices are trending sideways as investors turn their attention to U.S. inflation data due later today. The silence has come following a sharp Wednesday rally as 78% of earnings reports exceeded estimates. The latest headlines suggest tensions between the West and Russia over Ukraine may be easing. Increasing risk sentiment has already boosted commodity currencies, while the U.S. dollar is holding a narrow range.

How the bond market can support equities

U.S. and European government bond yields have been rising amid expectations of rate hikes but have been quieter on Wednesday and Thursday. Benchmark 10-year yields last stood at 1.9285%, down from 1.970% on Tuesday, a 27-month high. U.S. 2-year yields have already risen by 16 basis points since the end of last month, on top of the 44 basis points seen in January.

In the wake of last Friday's payroll report, yields increased this week, likely indicating that bonds have already made up their minds about today's CPI report, which is expected to be strong. Given that expectation, anything at the lower end of expectations could well trigger a sharp adjustment in pricing and a pullback in yields.

It seems that the bond market is basically seeing the Fed has some limitation in rate hikes due to broader debt market, and that's good news for stocks generally, and especially for growth stocks since these tend to be more valuable. The reaction of U.S. government bond markets following the release of inflation data can often be unpredictable, so traders should keep a close eye on the bond market dynamics.

DXY range keeps on hold

Recently, the U.S. Dollar Index attempted to drop below 95.50, but it did not develop sufficient downside momentum. In case the U.S. Dollar Index declines below this level, it will move towards support at 95.40, which will be bullish for EUR/USD.

Events of today

BoE governor Bailey will speak in European markets this morning, and E.U. economic forecasts will kick in later.

Investors will be keeping an eye on the latest US CPI report, which is highly anticipated to be released during U.S. market opening hours. January's Inflation rate is expected to increase by 7.3% year-over-year, while the Core Inflation Rate is anticipated to rise by 5.9%.

Forex trading is likely to stay calm until inflation data is released, as these reports will significantly impact currency dynamics. In the event of inflation exceeding analyst expectations, the Federal Reserve is expected to raise interest rates aggressively. On the other hand, EUR/USD should gain more ground.