Today, the US Consumer Price Index (CPI) report will be closely watched by investors and market participants as it may influence expectations of Fed rate cuts this year. Economists expect the US Consumer Price Index to rise 2.9% YoY in January and come in lower than December’s 3.4% increase. Annual Core CPI inflation is anticipated to fall to 3.7% in January.
What impact will it have on the USD?
The inflation report could impact the US dollar and provide clues as to the timing of the Fed’s policy pivot. If the inflation rate suggests easing inflationary pressures and CPI rates confirm expectations by coming in as expected or even lower, then the USD could weaken. This may force the hawkish Fed to shift its position and abandon its rhetoric of keeping rates high and for longer. On the other hand, the USD may find support if inflation rates come in higher than expected as it would reinforce the Fed’s hawkish stance regarding keeping rates higher and for a longer period.
When will the CPI rates be published?
The high-impact inflation data for January will be released by the Bureau of Labour Statistics (BLS) on Tuesday at 13:30 GMT. The release is important as it could change the market’s pricing of the Federal Reserve (Fed) policy pivot and could create extreme volatility around the USD.
Rate cut expectations
After the positive labour market data for January, markets are now focusing on the exact timing of the Fed’s policy pivot and don’t forecast a rate cut in March. The possibility of keeping rates unchanged at the next meeting has now increased to 80%, according to the CME FedWatch Tool.
The monthly Core CPI would really need to drop significantly for markets to re-evaluate the likelihood of a rate reduction in March. In this scenario, the USD could weaken. On the other hand, a stronger-than-expected increase in the inflation data could help support the dollar.
A rate cut in May remains unclear especially since there are two more sets of employment and inflation data to be released. For this reason, investors may be more cautious and wait to see how the economy performs in the coming months.
Economists at Commerzbank have also emphasised that it is early to think about cutting rates under the current conditions. “Disinflation is a marathon, not a sprint,” they said. They added that today’s figures may provide little new information, but surprises may happen: “the surprises of recent months have made it abundantly clear that things can then get very volatile.” The figures are also expected to highlight the Fed’s position and commentary in the past two weeks. In other words, the Fed will need to see “a few more months of good data” before they are certain that the economy is faring well. If the figures meet expectations, then it will be clear to all that a rate cut as early as March is out of the picture.