(Bloomberg) -- Currency traders are girding for a drop in the dollar in the wake of Wednesday’s key US inflation report. 

Option traders have been accumulating bearish bets on the world’s reserve currency in the run-up to the release of the April consumer price index. That sent a normally positive index of one-week risk reversals below par on Tuesday for the first time in two months.

Evidence that inflation is ebbing stands to reinforce Federal Reserve Chair Jerome Powell, who reiterated on Tuesday that an interest-rate hike is unlikely to be the central bank’s next move. In that scenario, traders are likely to refocus on the prospect of monetary easing this year — and downward pressure on the greenback.

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“A cool print could ignite hopes that the Fed is back on track for a summer cut, trimming the dollar’s yield advantage,” said Kyle Chapman, ​​​​FX markets analyst at ​Ballinger & Co. “But the Fed will likely be looking for a few months of improved data before they can start gaining confidence that it’s time to ease policy.”

Economists surveyed by Bloomberg expect the data to show the rate of change in US consumer prices slowed to 3.4% in April in from 3.5% a month earlier. 

An inflation reading that meets forecasts or comes in softer than expected stands to solidify expectations for two quarter-point interest-rate cuts from the Fed this year. The Bloomberg Dollar Spot Index slipped on Tuesday as Powell urged patience on inflation. 

Commodity Futures Trading Commission data for the week ended May 7 also shows traders are pulling back on large and bullish dollar bets. Non-commercial speculators, encompassing the likes of hedge funds and asset managers, now hold only about $24 billion in trades tied to wagers that the dollar will rise — the smallest amount since early April. 

The dollar has a history of slumping in the wake of cooler inflation data. Over the past year, there have been three below-forecast inflation misses. In each case, the dollar ended the trading week markedly lower.

While traders have soured on the dollar compared to many currency peers, it comes alongside an especially upbeat euro outlook. The relative premium for a call option on the common currency — or a wager that it will appreciate over the next week — has risen to the highest level since February. 

Europe-based investors have “fully unwound long dollar positions from the past month,” according to Bank of America Corp. strategists Howard Du and Vadim Iaralov. As a result, the firm has a bullish view on the euro against the dollar heading into the US inflation reading.

--With assistance from Vassilis Karamanis.

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