The US dollar is in the crossfire, caught between record-high inflation in the US and the increasingly hawkish Fed aiming to hike interest rates. However, the American currency managed to benefit from the situation.

Soaring inflation in the United States is a signal for the Federal Reserve to tighten its policy. The regulator is ready to increase the interest rate by 50 basis points to tackle the issue. Such a scenario would be favorable for USD, analysts say.

The US dollar remained stable against the euro late on Tuesday after the release of US CPI data. Inflation accelerated to 8.5% in March, reaching the highest level since December 1981. Month-over-month, consumer prices increased by 1.2%. However, the US dollar's reaction to macroeconomic data was surprisingly muted. Investors are biding their time, assuming that inflation is leveling off.

USD remained muted early on Wednesday. The US dollar retreated slightly against the euro, but held its ground against EUR. Market players are now bracing for the Fed's reaction to the inflationary spiral, as inflation remains at the highest level in 40 years.

The current consumer price dynamics are influencing the Fed's future strategy. With prices jumping by 1.2% month-over-month, the galloping inflation is a trigger for further Fed rate hikes and tightening. These measures are a bullish factor for USD.

The euro's position is much more precarious. EUR dropped to a 5-week low on Wednesday, as hopes of a peaceful settlement of the Russian-Ukrainian conflict faded. Geopolitics has been the deciding factor for EUR recently, and not macroeconomic data. However, high inflation could accelerate the ECB's hawkish shift, economists say. This would lead to policy tightening and rate hikes. Furthermore, many analysts expect the ECB to reassess the euro's prospects. However, drastic decisions by the EU regulator could result in many EUR bulls closing their positions, sinking EUR/USD.

Currently, EUR/USD is relatively stable and is moving within the 1.0844–1.0845 range. The pair could decline into the 1.0600–1.0700 area in the near future. However, EUR/USD could also rise to 1.0900–1.1000, if the geopolitical situation stabilizes.

Market players are reasonably confident that the Fed would react aggressively to galloping inflation. The regulator is using every tool available to curb price growth, although not all these measures are successful. Strong consumer demand has contributed to inflationary pressure. This demand cannot be easily fulfilled due to limited production capabilities and the drawdown in the labor market.

Growing consumer prices could drive the Fed to hike interest rates, as well as push up the yields of US Treasury bonds. This is likely to boost the US dollar, analysts say. USD could benefit from both galloping inflation and the Fed's monetary tightening.