The market is concerned that tomorrow's US inflation data will show a sharper decline, affecting the US dollar exchange rate.

The US Dollar Index (DXY) fell about 0.45% to the range of 102.00 in Tuesday's (April 11th) trading. After briefly strengthening amid Easter Monday's quiet trading, the greenback is under pressure as the market is concerned that tomorrow's US inflation data will show a sharper decline.

dxyDXY Daily chart via TradingView

The US employment report over the weekend has restored market expectations for a 25 basis point rate hike by the Fed in the upcoming FOMC meeting on May 2-3. However, the market speculates on the Fed's next steps (after the last rate hike).

Fed officials have expressed their intention to maintain interest rates at a high level until the end of the year. However, market data shows that many traders predict that the threat of recession will push the Fed to cut interest rates in the second half of this year.

US inflation data is one of the important references in this speculation. If the inflation rate slows down faster than expected, speculation of interest rate cuts will become more pronounced and pressure the US dollar exchange rate. But if the inflation slowdown is not as fast as expected, the Fed may maintain high-interest rates, which would be positive for the USD.

The consensus predicts that the US CPI inflation rate will grow by 0.2% in March, slower than the 0.4% growth in the previous period. The annual CPI inflation rate is likely to drop from 6.0% to 5.2%, but the annual core CPI estimate is expected to increase from 5.5% to 5.6%.

"A lot of traders are focused on this inflation data," said Edward Moya, senior market analyst at OANDA in New York. "Everyone's trying to get a sense of does the disinflation process return and does this complicate what the Fed does."

"The current projection of the Cleveland Fed indicates a strong 0.5% monthly increase (~6% annualized) in core inflation," said Joseph Capurso, the head of international economics at the Commonwealth Bank of Australia, "If the Cleveland Fed's estimate proves to be correct, short-term speculation of a Fed rate cut may be halved. This reduction in speculation could significantly support the USD."

After the release of US inflation data tomorrow, the publication of the FOMC meeting minutes from last March will draw public attention. Opinions of Fed officials contained in the minutes could also affect speculation on interest rates and the US dollar exchange rate in the short term.