Data on inflation might be encouraging for USD backers.
The predicted decrease in inflation from the 9.1% peak in June may take longer than expected, which might be advantageous for the dollar and the risk markets. It is expected that the annual headline inflation rate would be 6.2%, which would be the lowest since October 2021 but still mark the smallest month-to-month decline since September. Although it is anticipated that the core inflation rate would drop from 5.7% to 5.5%, this might be countered by rising rent and the cost of used cars.
Uncertainty Increases Due to Methodology Change in Inflation Data
The BLS, the US government statistics organization, is altering how it calculates inflation estimates, so there is some ambiguity about this month’s inflation report. Some analysts think that the new weights, which will be modified annually rather than every two years, may cause inflation to increase. For instance, using the new seasonal adjustments that the BLS announced, the average core CPI for the last three months of 2022 increased from 3.1% to 4.3%.
Powell’s Dovish Tone
When he said that the disinflationary process had started recently during the FOMC meeting in a speech a week later, Chair Powell adopted a more dovish position than was anticipated. A slower-than-anticipated decline in CPI may temper the hawkish repricing that the markets experienced after the encouraging non-farm payrolls data earlier this month.
Concentrate on Core Reading
A higher monthly core reading, however, may provide the hawks the chance to demand another interest rate increase in May, which might cause the Fed funds rate to rise over 5.25%. Price pressures might continue if the job market remains tight, pressing the Fed’s hand. This may cause the market to anticipate any shift toward relaxing this year, which would push the dollar up again. A hotter-than-expected report may also spark a Valentine’s Day slaughter in the risk markets, perhaps having an impact on the Nasdaq. This may cause the bank’s cycle of tightening to finish sooner, which would hurt the pound.
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