Navigating the US CPI data release

The Federal Reserve’s latest decision to hike rates by 25bps, taking the US Federal Funds Rate to 4.75%, saw the DXY trade lower from the 101.70 price level, down to a low of 100.82. This move lower was primarily due to comments from Fed Chair Powell, indicating that the disinflation process has started and that he expects significant declines in inflation this year. While he did indicate that further rate increases would be needed for the Federal Reserve to achieve its inflation target of 2%, markets focussed on the term “disinflation” and speculated that the Fed would not tighten more than expected.

The US CPI for January is due today, with analysts forecasting the data to be released at 6.2% (Previous: 6.5%). Market volatility is expected to be significant as the US CPI report is now the most watched economic release, given its potential impact on the Fed’s future interest rate decisions.

If the CPI was released as forecasted at 6.2% or lower

This would signal that inflation growth is slowing down and the Fed’s view of disinflation is reinforced. Consequently, markets could further price in the case of a slowdown in future interest rate hikes. This could see the DXY move with similar price action to the previous CPI release on the 12th of January, dropping by approximately 120pips.  Look for the DXY to trade lower toward the key support level of 102.60, and beyond that, 101.55.

If the CPI was released higher than the forecast of 6.2%

Not ruling out the scenario that inflation surprises markets by staying elevated, especially given that energy prices were trading higher in January. This could see investors further speculate on a more hawkish tone and rate hikes from the Federal Reserve at its next meeting in March. While the DXY could climb significantly higher, risk assets like the US indices could reverse recent gains, breaking through the upward trend line from early January, to retest the near-term key support level of 4060 and the round number level of 4000.