It could be a make or break day for the dollar- check out the USD index

The release of the US CPI report could define the price action for the dollar to come in the near future. It could also define the markets outlook for US monetary policy and of course the two are in lockstep in terms currency direction going forward. As noted here yesterday, the markets are expecting the January US CPI report to show a moderation in prices. That is by no means a given though and therein lies the rub. If that CPI data is running hotter than forecast, then it will see the dollar rise. Of course if CPI is cooler, then we should see an opposite reaction. Ahead of this release, at 1.30pm GMT the dollar is holding gains. The USD index (USDX) rebounded from a test of 104 and closed last night at 104.17. It has not strayed too far from that closing level so far today, which is understandable given the importance of this US CPI data. The range seen so far has been covered by 104.11 to 104.25. It is currently near the top end of that range, as the EUR/USD treads water at lower levels and the gains in the USD/JPY are being mostly balanced by a rise in the GBP/USD this morning