Barclays anticipates that the upcoming US CPI (Consumer Price Index) data release could further strengthen the US dollar, primarily due to the over 20% surge in oil prices. However, the bank outlines five key reasons that could limit the extent of the dollar's rally.

Key Points:

• US CPI and Dollar Strength: A strong CPI print, largely influenced by surging oil prices, may contribute to further dollar strength by stoking fears of core inflation and potentially leading to another Fed rate hike.

• Limits to Dollar Rally:

  1. Supply-Driven Oil Prices: The oil price surge is mainly due to supply issues and is happening late in the economic cycle, following significant policy tightening. Therefore, its second-round effects could actually be disinflationary. Barclays notes that medium-term US breakeven inflation rates have declined slightly recently.

  2. Potential Improvement in China's Growth: With China's loan and credit data expected soon, and indications of bottoming out in trade and PMI data, there may be a tactical improvement in China's growth.

  3. Shift in Dollar Sentiment: Barclays' proprietary measures show that sentiment around the dollar has shifted rapidly from highly bearish to substantially bullish, suggesting a potential overshoot.

  4. ECB's Stance: The ECB is not expected to turn dovish, even if it holds rates steady in the upcoming meeting. Market pricing also reflects only one more rate hike for the ECB until the end of the economic cycle.

  5. Potential for Yen Intervention: With USD/JPY trading around 150, there's an increased likelihood of intervention in the yen market.

Conclusion:

Barclays anticipates that while the US CPI data could boost the dollar, there are significant constraints to consider. From the oil price dynamics to shifts in sentiment and central bank policies, there are multiple factors that could put a ceiling on how far the dollar can rally in the near term.