The story of the day for financial market participants comes from the United States. The February inflation report was released today – a critical piece of data ahead of next week’s Fed decision.
It showed the monthly CPI in line with expectations, up by 0.4%. Also, yearly inflation slowed to 6.0% from 6.4%.
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But the real story comes from the core data, which excludes food and energy prices. It ticked higher, 0.5% on 0.4%, complicating the picture for the Fed.
As such, today’s report has bullish implications for the US dollar for at least the following reasons:
- Core CPI inflation still has a long way to go down
- Disinflation has run out of steam
- More rate hikes are coming
Core CPI inflation remains elevated
Inflation trends don’t look great for those looking for the pressure on the prices of goods and services to ease. For the Fed to meet its price stability target, core inflation needs to come down a lot.
In other words, inflation remains stubbornly high so late in the tightening cycle. Core inflation needs to fall below 0.3% for the Fed to meet its forecast of 3.5% core PCE inflation in Q4 2023.
Disinflation has run out of steam
The Fed mentioned that a disinflation process is currently in motion. But today’s data shows the opposite.
Quarter-over-quarter and 3-month core inflation rates ticked up. Therefore, the disinflation narrative that supported stocks and triggered a wave of dollar selling is likely over.
More rate hikes from the Fed
In light of the new data, market participants should expect more rate hikes from the Fed. The Fed’s Chair, Jerome Powell, raised the odds of a 50bp rate hike, but those odds quickly faded as two regional banks in the US failed.
Nevertheless, today’s data, coupled with the strong NFP report published last Friday, support a hawkish stance from the Fed. Therefore, the US dollar should remain in demand.