Dollar Holds Steady Despite Softer Inflation, Geopolitical Tensions Loom

The US Dollar remained surprisingly stable on Wednesday, defying expectations of a significant drop following the release of February’s Consumer Price Index (CPI). While the data revealed a slower pace of inflation than anticipated, traders appeared to largely shrug off the news, maintaining the dollar’s position in the mid-103.00 range on the US Dollar Index (DXY). This index, which measures the dollar’s strength against a basket of six major currencies, showed minimal movement despite the favorable inflation figures.

The CPI report indicated a clear deceleration in price pressures. Both headline and core inflation figures for February fell below consensus estimates, suggesting that inflation was indeed cooling before the implementation of new tariffs by US President Donald Trump in March. Specifically, monthly headline inflation registered at 0.2%, down from 0.5% in January and below the expected 0.3%. Core inflation also eased to 0.2%, marginally lower than the projected 0.3%. Similarly, annual figures demonstrated a softening trend, with headline inflation dropping to 2.8% and core inflation to 3.1%.

Ordinarily, such a significant miss on inflation data would fuel expectations of Federal Reserve rate cuts, leading to a weaker dollar. However, the market’s reaction was muted. This raises questions about the prevailing narrative driving dollar movements, suggesting that other factors, particularly geopolitical tensions, are playing a crucial role.

The global landscape remains fraught with uncertainty. China reiterated its pledge to retaliate against US tariffs, while the European Union announced plans to implement countermeasures by April 13th. Adding to the complexity, reports emerged of a potential ceasefire truce in the Ukraine-Russia conflict, brokered by the US, with Russia now facing a decision on whether to accept the deal. These geopolitical developments are likely contributing to market caution and offsetting the impact of the softer inflation data.

Despite the limited immediate reaction, the CPI report does reinforce the possibility of future Fed rate cuts. The CME FedWatch Tool currently indicates a 97% probability of no rate change at the upcoming March 19th meeting. However, the probability of a cut at the May 7th meeting stands at 37.6%, rising to 81.7% by June. This suggests that while the Fed may hold steady in the short term, the pressure to ease policy could intensify in the coming months.

Looking ahead, traders are closely monitoring the US Treasury’s 10-year Note auction and a speech by St. Louis Fed President Alberto Musalem. Additionally, equity markets are reacting positively to the inflation news, with European and US indices experiencing gains exceeding 1%. The US 10-year Treasury yield, currently around 4.31%, remains off its recent lows, indicating some stability in the bond market.

From a technical perspective, the DXY faces potential selling pressure amid ongoing recession fears and concerns about the impact of tariffs. While the softer inflation data could alleviate some recession concerns, it also reinforces expectations of Fed rate cuts, which could weigh on the dollar. Key levels to watch on the upside include the 104.00 and 105.00 marks, with the 200-day Simple Moving Average (SMA) at 105.03 presenting a significant hurdle. Conversely, a break below the 103.00 level could open the door to further downside, potentially targeting 101.90 if market sentiment turns decisively bearish. In essence, the dollar remains caught between competing forces, with inflation data hinting at a potential weakening trend while geopolitical uncertainties provide a counterbalancing influence.