The dollar continues to lose ground ahead of today's release of latest US inflation data. (read more in the article Major economic events for September, 12 - September, 18). As of this article's publication, its DXY index is near 107.78. After hitting a 20-year high of 110.78 last Wednesday, the DXY index started falling dramatically both amid improving investor sentiment in the stock market and after the ECB's decision to raise interest rates last Thursday. The ECB hiked interest rates by 0.75% instead of the expected 0.50% increase.

The dollar now needs new drivers to resume rising. Even despite the current decline and correction, it has the potential for further growth.

Such drivers will likely appear today when the US Consumer Price Index for August will be released at 12:30 (GMT).

Consumer prices account for most of the overall inflation, and soaring prices are forcing the central bank to raise interest rates. If inflation falls, the Fed might cut its monetary policy tightening. This fact will be negative for the dollar.

The next Fed meeting is scheduled for September 20-21. According to the CME Group, market makers consider there is a high probability that the interest rate will be raised by 0.75% at this meeting.

However, if Fed policymakers signal a slowdown in the monetary tightening, the dollar may decline even further. The more dovish the rhetoric of their statements, the stronger the weakening of the dollar could be.

Despite the 5th consecutive day of easing, the DXY index maintains its positive momentum. A consistent breakthrough of the resistance levels at 109.00, 110.00 and 111.00 would signal a potential for growth to the 20-year levels above 120.00.

As for the euro, the dollar's major rival on the currency market, it gained support due to the outcome of the ECB meeting last week. Currently, the euro is strengthening both in cross rates, excluding the CHF cross rates, and against the dollar. As of this article's publication, the EUR/USD pair is trading near 1.0160, up from last week's local low of 0.9865.

Probably, it will probably be another pullback above parity at 1.0000. However, it is still unclear whether the pair will rise further. It will mostly depend on both the ECB and the Fed position concerning the prospects of the monetary policy. As for the Fed, it will not make any statements before its meeting on September 20-21. Its policymakers kept silent.

Overall, despite the current correction of nearly 300 pips, the EUR/USD pair is still declining (see details in the article "EUR/USD: technical analysis and trading recommendations for September 13, 2022").

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