Home Forex US consumer price index data for January could influence the trajectory of Federal Reserve policy

US consumer price index data for January could influence the trajectory of Federal Reserve policy

by SuperiorInvest


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  • The US consumer price index is expected to increase by 3% year-on-year in January, down from 3.4% in December.
  • Year-on-year core CPI inflation should decrease slightly to 3.8% in January.
  • The inflation report could weigh on the US dollar by providing clues about the timing of the Fed's policy change.

The high-impact American consumer Price index Inflation (CPI) data for January will be released by the Bureau of Labor Statistics (BLS) at 13:30 GMT on Tuesday. Inflation data could change market pricing of a key Federal Reserve (Fed) policy point, fueling extreme volatility around American dollar (AMERICAN DOLLAR).

What to expect in the next CPI data review?

Inflation in the United States (US) is expected to rise at an annual rate of 3% in January, down slightly from the 3.4% increase reported in December. The rate of CPI inflation, which excludes volatile food and energy prices, is forecast to fall to 3.8% from 3.9% over the same period.

Monthly CPI and core CPI rose 0.2% and 0.3%, respectively.

The BLS said on Friday that it revised the monthly consumer price index (CPI) growth lower for December to 0.2% from 0.3%. Core CPI was unrevised at 0.3% over the same period. On the other hand, November's CPI growth was revised higher to 0.2% from 0.1%, while October's 0.1% growth was unchanged. The BLS noted that the CPI revisions reflect new seasonal factors.

In January, Oil prices rose more than 6% on growing fears of a supply shock from the ongoing Red Sea crisis. Meanwhile, the Manheim Used Vehicle Index was unchanged over the same period. In a preview of the inflation report, “We expect core inflation to remain relatively unchanged at 0.3% m/m in January, with the headline figure likely to slow by a tenth to 0.1%,” analysts at TD Securities said. “Our unrounded CPI forecast of 0.27% m/m suggests a narrow increase of between 0.2% and 0.3%. The report is likely to show that used vehicle prices have been a big drag on inflation, while OER/rentals are expected to move sideways.”

How could the US CPI report affect EUR/USD?

After impressive January labor market data, markets changed their view on the timing of the Federal Reserve's (Fed) policy change and refrained from pricing in a rate cut in March. According to the CME FedWatch Tool, there is a greater than 80% chance that the Fed will leave the key interest rate unchanged at the next meeting.

At this point, it will take a significant downside surprise, negative print, in the monthly Core CPI data for markets to reconsider the possibility of a rate cut in March. In this scenario, US Treasury yields could turn south, weighing on the US dollar (USD). On the other hand, a stronger-than-forecast increase in these data could have a short-term positive impact on the USD's performance against its rivals.

Markets are still unsure whether Fed will decide on a rate cut in May. Two more sets of employment and inflation data will be available between today and the May policy announcement. Investors could therefore hold off on taking large positions based on January's inflation data and wait to see how the economy develops over the next few months.

Eren Sengezer, European Session Lead Analyst at the company FXStreet, offers a brief technical outlook for EUR/USD, explaining: “EUR/USD is holding steady around 1.0800, where the 100-day simple moving average (SMA) and the Fibonacci 50% retracement of the uptrend from October to December coincide. In case the pair fails to stabilize above this level, 1.0700 (Fibonacci 61.8% retracement) can be seen as further support ahead of 1.0660 (static level) and 1.0600 (psychological level).

“On the downside, the 200-day SMA forms firm resistance at 1.0840 before 1.0900 (psychic level) and 1.0950 (Fibonacci 23.6% retracement).

Economic indicator

United States Consumer Price Index (YoY)

Inflationary or deflationary tendencies are measured by periodically adding up the prices of a basket of representative goods and services and reporting the data as the Consumer Price Index (CPI). CPI data is compiled on a monthly basis and published by the US Department of Labor Statistics. Year-on-year data compare the prices of goods in the reference month with the same month of the previous year. The CPI is a key indicator for measuring inflation and changes in purchasing trends. Generally speaking, a high value is seen as bullish for the US dollar (USD), while a low value is seen as bearish.

Read more.

Next release: 13/02/2024 13:30:00 GMT

Frequency: Monthly

Source: US Bureau of Labor Statistics

The US Federal Reserve has a dual mandate of maintaining price stability and maximum employment. According to this mandate, inflation should hover around 2% year-on-year and has become the weakest pillar of the central bank's directive since the pandemic hit the world, which continues to this day. Price pressures continue to mount due to supply chain issues and bottlenecks, with the Consumer Price Index (CPI) hanging at multi-decade highs. The Fed has already taken steps to tame inflation and is expected to maintain an aggressive stance for the foreseeable future.

Inflation FAQ

Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile items such as food and fuel, which can fluctuate due to geopolitical and seasonal factors. Core inflation is the figure that economists focus on, and it's the level that central banks, which are charged with keeping inflation at a manageable level, usually around 2%, aim for.

The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure central banks focus on because it excludes volatile food and fuel inputs. When Core CPI rises above 2%, it usually leads to higher interest rates, and vice versa when it falls below 2%. Because higher interest rates are positive for a currency, higher inflation usually leads to a stronger currency. The opposite is true when inflation is falling.

Although it may seem counterintuitive, high inflation in a country pushes up the value of its currency and vice versa pushes inflation down. That's because the central bank will typically raise interest rates to combat higher inflation, which attracts more global capital inflows from investors looking for a lucrative place to park their money.

Gold used to be an asset that investors turned to during times of high inflation because it retained its value, and while investors often still buy gold for its safe-haven properties during times of extreme market turbulence, this is usually not the case. . This is because when inflation is high, central banks will raise interest rates to combat it.
Higher interest rates are negative for gold because they increase the opportunity cost of holding gold relative to an interest-bearing asset or putting money in a cash deposit account. On the other hand, lower inflation tends to be positive for gold as it lowers interest rates, making the light metal a more viable investment alternative.

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