The all-important US inflation data is out today, and the report could provide fresh insights on the timing of the Federal Reserve’s (Fed) policy shift. The US Consumer Price Index (CPI) inflation data is also anticipated to create volatility around the US dollar (USD).
When will the inflation data be published?
The inflation data for February will be published by the Bureau of Labour Statistics (BLS) on Tuesday at 12:30 GMT. The data could change the Fed’s policy pivot and impact the USD.
US inflation data: What to expect?
The US Consumer Price Index (CPI) is expected to rise 3.1% YoY in February, the same as January’s increase. Annual Core CPI inflation is set to drop lower to 3.7% in February down from 3.9% recorded in January. Strong US CPI data could diminish the chances of an immediate rate cut by the Fed. The monthly CPI and the Core CPI are forecast to rise 0.4% and 0.3%, respectively.
Inflation trajectory to influence rate cuts
Fed Chair Jerome Powell indicated that potential cuts in borrowing costs may come sometime this year, but such a decision will be determined by the path of inflation and whether it aligns with the Fed’s 2% target. According to the CME FedWatch Tool, there has been a slight drop in the probability of a rate cut in June, which currently stands at 68.9%.
Federal Reserve policy outlook
Fed Chairman Powell, during his semi-annual testimony before US Congress said that the future of the economy is extremely unpredictable. He added that despite the improvement in inflation targets, progress is still not certain. On the policy front, he suggested that it may be time to begin interest rate cuts in 2023, however, the Fed would need to have more certainty that inflation will settle down to 2% before taking any action.
How could the US CPI affect the EUR/USD?
CPI data from January revealed that the disinflationary process has slowed down. The annual CPI and the Core CPI advanced at a slightly faster pace than in the previous month of December. These readings were positive for the greenback in the short-term, but the market had already priced in a possible delay of the Fed policy pivot after the recent labour market data for January.
According to the CME FedWatch Tool, markets are now pricing in a high 75% likelihood of a Fed cut in June. The February CPI figures may not be a game changer for the present market positioning, however, a higher-than-expected monthly Core CPI could push the USD higher. As economists at Commerzbank noted, “If today’s figures are strong again, the market therefore may push back its rate cut expectations a bit. The USD should benefit from this.” However, a monthly Core CPI release at the market consensus of 0.3% or lower could serve as proof that June may be the month of a policy pivot. In this case then, the USD may weaken initially, but it won’t fall further unless there’s a risk-on rally in US stocks or a significant dip in the 10-year US Treasury bond yield.