- The US Consumer Price Index is set to rise 3.1% YoY in February, matching January’s increase.
- Annual Core CPI inflation is expected to edge lower to 3.7% in February.
- The inflation report could provide fresh clues as to the timing of the Fed policy pivot.
The high-impact US Consumer Price Index (CPI) inflation data for February will be published by the Bureau of Labor Statistics (BLS) on Tuesday at 12:30 GMT. Inflation data could alter the market’s pricing of the Federal Reserve (Fed) policy pivot, ramping up volatility around the US Dollar (USD).
What to expect in the next CPI data report?
Inflation in the United States (US) is forecast to rise at an annual pace of 3.1% in February, matching the increase recorded in January. The Core CPI inflation rate, which excludes volatile food and energy prices, is forecast to tick down to 3.7% from 3.9% in the same period.
The monthly CPI and the Core CPI are seen increasing 0.4% and 0.3%, respectively.
In his semi-annual testimony before the US Congress, Federal Reserve Chairman Jerome Powell said that the economic outlook was uncertain and that the ongoing progress toward the 2% inflation goal was not assured. Regarding the policy outlook, Powell reiterated that it will likely be appropriate to begin lowering the policy rate at some point this year but added that they would like to have greater confidence inflation will move sustainably toward 2% before taking action.
Previewing the February inflation report, “we expect next week’s CPI report to show that core inflation slowed to a 0.3% m/m pace in February after posting an acceleration to 0.4% in the last report,” said TD Securities analysts in a weekly report. “Despite slowing, our m/m projection would keep the core’s 3-month AR pace unchanged at a still elevated 4.0%. Note that our unrounded core CPI forecast at 0.31% m/m suggests balanced risks between a 0.2% and a 0.4% gain.”
How could the US Consumer Price Index report affect EUR/USD?
The Consumer Price Index (CPI) data for January showed that the disinflationary trend slowed down. The annual CPI and the Core CPI rose at a slightly stronger pace than in December. The positive impact of these readings on the US Dollar (USD), however, remained short-lived because markets were already anticipating a delay in the Fed policy pivot following the impressive labor market data for January. After rising 0.7% and touching its highest level since mid-November near 104.00 on the day of the January CPI release (February 13), the USD Index (DXY) went into a downtrend.
Markets are currently pricing in a nearly 75% probability that the Fed will lower the policy rate in June, according to the CME FedWatch Tool. Although February CPI figures are unlikely to alter the market positioning in a significant way, a stronger-than-forecast increase in the monthly Core CPI could help the USD stage a rebound against its rivals with the immediate reaction. Investors could see such data as an opportunity to unwind USD shorts following the previous week’s sell-off.
On the other hand, a monthly Core CPI print at or below the market consensus of 0.3% could reaffirm June as the month of the policy pivot. The market positioning, however, suggests that the USD doesn’t have a lot of room left on the downside. In this scenario, the USD could weaken in the initial reaction, but an extended sell-off could be hard to come by unless it’s accompanied by a risk rally in US stocks or a sharp decline below 4% in the benchmark 10-year US Treasury bond yield.
Eren Sengezer, European Session Lead Analyst at FXStreet, offers a brief technical outlook for EUR/USD and explains: “The Relative Strength Index (RSI) indicator on the daily chart edged lower after coming within a touching distance of 70, suggesting that investors are taking a break before betting on another leg higher in EUR/USD. On the upside, 1.0960 (Fibonacci 23.6% retracement level of the October-December uptrend) aligns as interim resistance ahead of 1.1000 (psychological level, static level). If the pair manages to stabilize above the latter, 1.1100 (end-point of the uptrend) could be set as the next bullish target.”
“Looking south, strong support seems to have formed at 1.0830-1.0840, where the 100-day and the 200-day Simple Moving Averages (SMA) are located. A daily close below this support area could open the door for an extended correction toward 1.0800.”
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
Source: https://www.fxstreet.com/news/us-cpi-data-preview-headline-inflation-seen-steady-in-february-on-increasing-gas-prices-core-to-decline-202403120300