- The US Consumer Price Index is expected to rise 3.1% year-over-year in February, matching January's increase.
- Annual core CPI inflation is expected to decline to 3.7% in February.
- The inflation report could provide new clues about when the Fed will pivot its monetary policy.
The Bureau of Labor Statistics (BLS) will publish inflation data for the year on Tuesday at 12:30 GMT. US Consumer Price Index (CPI) for February. Inflation data could alter the market's assessment of the Federal Reserve's (Fed) monetary policy pivot, increasing volatility around the US dollar (USD).
What to expect from the next CPI data?
Inflation in the United States is expected to increase at an annual rate of 3.1% in Februaryequaling the increase recorded in January. The core CPI inflation rate, which excludes food and energy price volatility, would drop to 3.7% from the 3.9% registered in the same period.
The CPI and monthly core CPI are expected to rise by 0.4% and 0.3%, respectively.
In his semiannual appearance before the United States Congress, the president of the Federal Reserve, Jerome Powell, stated that the economic outlook was uncertain and progress towards the 2% inflation target was not assured. Regarding the outlook for monetary policy, Powell reiterated that it will probably be appropriate to start lowering the policy rate at some point this year, but added that they would like to have greater confidence that inflation will move steadily towards the 2% before taking action.
Regarding the February inflation report, “we expect next week's CPI to show that core inflation slowed to a rate of 0.3% month-on-month in February, after registering an acceleration to 0.4% in the last report,” the TD Securities analysts in a weekly report, “despite the slowdown, our month-over-month projection would keep the three-month core inflation pace unchanged at a still elevated 4.0%.” Note that our unrounded Core CPI forecast of 0.31% MoM suggests risks balanced between a 0.2% and 0.4% increase.”
How could the US Consumer Price Index affect EUR/USD?
Consumer Price Index (CPI) data for January showed a slowdown in the disinflationary trend. The CPI and core CPI year-on-year increased at a slightly faster pace than in December. However, the positive impact of these readings on the US Dollar (USD) was short-lived because markets were already anticipating a delay in the Fed's monetary policy shift following January's impressive labor market data. After rising 0.7% and hitting its highest level since mid-November, near 104.00, on the day of the January CPI publication (February 13), The DXY Dollar Index entered a bearish trend.
According to the CME's FedWatch tool, markets currently value the probability that the Fed will lower the official interest rate in June at almost 75%. Although the February CPI figures are unlikely to alter market positioning significantly, A larger-than-expected increase in the monthly core CPI could help the dollar stage a rebound against its rivals as an initial reaction.. Investors could see this data as an opportunity to get rid of the dollar's bearish positions after the previous week's fall.
On the other hand, if the monthly underlying CPI is at 0.3% or below the market consensus, June could reaffirm itself as the month of political change. However, market positioning suggests that the Dollar does not have much room left to the downside. In this scenario, the USD could weaken as an initial reaction, but a prolonged sell-off would be difficult to occur unless accompanied by a risk-on rally in US stock markets or a sharp drop below 4% in the 10-year US Treasury bond benchmark yield.
Eren Sengezer, Chief Analyst of the European session at FXStreet, offers a brief technical outlook for the EUR/USD and explains: “The Relative Strength Index (RSI) on the daily chart turned lower after approaching 70, suggesting that investors are taking a breather before betting on another move higher in EUR/USD. Looking up, 1.0960 (23.6% Fibonacci retracement of October-December uptrend) lines up as tentative resistance ahead 1.1000 (psychological level, static level). If the pair manages to stabilize above this last level, 1.1100 (end point of the bullish trend) could be set as the next bullish target.”
“Looking down, strong support appears to have formed on 1.0830-1.0840, where the 100-day and 200-day simple moving averages (SMA) are located. A daily close below this support zone could open the door to a prolonged correction towards 1.0800“.
Inflation FAQ
What is Inflation?
Inflation measures the rise in prices of a representative basket of goods and services. General inflation is usually expressed as a month-on-month and year-on-year percentage change. 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 economists focus on and is the target level of central banks, which are mandated to keep inflation at a manageable level, typically around 2%.
What is the Consumer Price Index (CPI)?
The Consumer Price Index (CPI) measures the variation in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage of inter-monthly and inter-annual variation. Core CPI is the target of central banks as it excludes food and fuel volatility. When the underlying CPI exceeds 2%, interest rates usually rise, and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually translates into a stronger currency. The opposite occurs when inflation falls.
What is the impact of inflation on currency exchange?
Although it may seem counterintuitive, high inflation in a country drives up the value of its currency and vice versa in the case of lower inflation. This is because the central bank will typically raise interest rates to combat higher inflation, attracting more global capital inflows from investors looking for a lucrative place to park their money.
How does inflation influence the price of Gold?
Gold was once the go-to asset for investors during times of high inflation because it preserved its value, and while investors often continue to purchase gold for its safe haven properties during times of extreme market turmoil, this is not the case. most of the time. This is because when inflation is high, central banks raise interest rates to combat it.
Higher interest rates are negative for Gold because they increase the opportunity cost of holding Gold versus an interest-bearing asset or placing money in a cash deposit account. On the contrary, lower inflation tends to be positive for Gold, as it reduces interest rates, making the shiny metal a more viable investment alternative.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
