US Dollar price action gained ground across the board of major currency pairs on Monday. USD/JPY and EUR/USD, which are the two largest components of the DXY Index, advanced 23-pips and declined 16-pips, respectively. This could be explained by shifts in trader positioning ahead of high-impact event risk posed by tomorrow’s release of US inflation data. The monthly CPI report is scheduled to cross market wires Tuesday, 13 July at 12:30 GMT.

As detailed on the DailyFX Economic Calendar, headline CPI is expected to print at 4.9% year-over-year with core inflation is expected to come in at 4.0%. US Dollar bulls will likely have a keen eye out for potential upward surprises to CPI data as this stands to place more pressure on the Federal Reserve to taper asset purchases. That said, in-line or below-forecast inflation would likely spark a bearish reaction by the broader US Dollar. It seems that the latter scenario is more likely to materialize, which could provide an opportunity for US Dollar bears to consider fading recent strength.

DXY INDEX – US DOLLAR PRICE CHART: WEEKLY TIME FRAME (NOVEMBER 2019 TO JULY 2021)

Chart by @RichDvorakFX created using TradingView

Not to mention, FOMC officials have resolutely voiced how the runup in inflation is not only anticipated, but also likely to be transitory. Furthermore, in light of last year’s shift to average inflation targeting, the Fed is poised to ‘look-through’ temporary overshoots in inflation while maintaining credibility for its accommodative policy path. Another material upward surprise in inflation data, perhaps with a reading north of 5% on headline CPI, could complicate the transitory narrative nonetheless.

This brings to focus important technical levels that might influence DXY Index price action. Specifically, confluent resistance facing the broader US Dollar Index looks formidable between the 92.80-93.50 price zone. Invalidating this technical obstacle could open up the door for US Dollar bulls to make a push toward the 94.50-price level underpinned by the September 2020 swing high. On the other hand, technical support might be found around the 20-week simple moving average near the 91.50-price level.

Last but not least, taking a quick look at overnight implied volatility readings for the US Dollar suggests that there may be a relatively tame reaction to tomorrow’s CPI report release. USD/JPY overnight implied volatility of 6.4%, for example, is just modestly above its 20-day average reading of 5.5%. This figure is also below USD/JPY overnight implied volatility of 7.9% headed into last month’s inflation data release. As such, this arguably reinforces odds that US Dollar strength is faded as traders place more emphasis on the Fed’s other mandate – full employment – rather than on inflation and price stability.