The eagerly anticipated US Consumer Price Index (CPI) data for January is scheduled for release by the Bureau of Labor Statistics (BLS) on Tuesday at 13:30 GMT, with analysts forecasting potential impacts on Federal Reserve (Fed) policy outlook and US Dollar (USD) performance.
What’s Expected in the CPI Data Report?
Analysts project that inflation in the US will likely rise by 3% on a year-on-year basis in January, slightly lower than December’s 3.4% increase. Core CPI inflation, excluding volatile food and energy prices, is expected to edge down to 3.8% from 3.9% in December. Monthly increases of 0.2% for CPI and 0.3% for Core CPI are anticipated.
The BLS revised the December CPI increase downwards to 0.2% from 0.3%, while leaving the Core CPI unchanged at 0.3%. November’s CPI increase was revised upwards to 0.2% from 0.1%, while October’s growth remained at 0.1%. These revisions reflect new seasonal adjustment factors.
Oil prices surged over 6% in January due to concerns about a supply shock from the crisis in the Red Sea, while the Manheim Used Vehicle Index remained unchanged. Analysts predict that used vehicle prices might drag on inflation, while OER/rents are expected to remain stable.
Potential Impact on EUR/USD:
After strong labor market data for January, market sentiment regarding the timing of the Fed’s policy pivot has shifted, with a reduced probability of a rate cut in March. A significant downward surprise in the monthly Core CPI data could prompt markets to reconsider this possibility, potentially leading to a decline in US Treasury Bond yields and weighing on the USD.
Conversely, a stronger-than-expected increase in the CPI data could briefly boost the USD’s performance against its counterparts. However, uncertainty remains regarding whether the Fed will opt for a rate cut in May, with investors likely to wait for further economic data before making significant trading decisions.
Technical Outlook for EUR/USD:
EUR/USD is currently trading around 1.0800, near the 100-day Simple Moving Average (SMA) and the Fibonacci 50% retracement level. Failure to hold above this level could see support levels at 1.0700, 1.0660, and 1.0600. On the upside, resistance levels are at 1.0840, 1.0900, and 1.0950, with the 200-day SMA posing a significant barrier.
ECONOMIC INDICATOR
United States Consumer Price Index ex Food & Energy (YoY)
Inflationary or deflationary tendencies are measured by periodically summing the prices of a basket of representative goods and services and presenting the data as the Consumer Price Index (CPI). CPI data is compiled on a monthly basis and released by the US Department of Labor Statistics. The YoY reading compares the prices of goods in the reference month to the same month a year earlier. The CPI Ex Food & Energy excludes the so-called more volatile food and energy components to give a more accurate measurement of price pressures. Generally speaking, a high reading is bullish for the US Dollar (USD), while a low reading is seen as bearish.
US DOLLAR FAQS
What is the US Dollar?
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.
How do the decisions of the Federal Reserve impact the US Dollar?
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.
What is Quantitative Easing and how does it influence the US Dollar?
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.
What is Quantitative Tightening and how does it influence the 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.