CPI Breaks from Recent Trends

Following Fed Chair Powell's latest comments on the possibility of more interest rate hikes, there is likely to be an increased focus on core CPI.

Core Down as Fast as Headline?

The current forecasts show US CPI figures for January breaking from their recent trends. So far, headline inflation has been coming down surprisingly fast, repeatedly below expectations. Since a large portion of the drive higher in inflation was from energy, it's unsurprising that as crude prices came down in the latter half of the year, so would headline inflation.

The core rate had been stickier, though, nearly tripping the Fed's target rate. This was one of the reasons some analysts were less optimistic about the Fed easing up on the tightening, despite the rapid drop in consumer prices. But now the forecast is for headline inflation to come down just two decimal points to 6.3% from 6.5% prior, and core inflation is expected to drop by three decimals from 5.7%. Although the difference might be due to rounding, it's still a change of pace where the core is coming down at least as fast as headline CPI.

Jobs Data Likely to Weigh on Narrative

The data could be some vindication for the Fed, which hiked more aggressively than its peer, the ECB. Inflation in the US peaked lower and has come down faster than in the shared economy. It could also provide some impetus for the ECB to keep tightening since European interest rates are less than half of the US', but inflation is still much higher. The expected narrowing of the interest rate gap between the two economies could help propel the EURUSD higher.

Recent commentary from Fed officials has turned to employment, as the unemployment rate unexpectedly dropped to 3.4% in January. A tight jobs market could lead to more inflation down the road. If inflation were to come down less than expected, it could build on the narrative that the Fed will hike more than expected. However, a faster-than-expected drop in core inflation could relieve markets shocked by last month's large job numbers.

EUR/USD in Flag Correction

Eurodollar appears in a flag correction, if not an outright reversal, but is spiralling downward either way. Without a decent move above $1.08 at play, the pair could continue its decline down to $1.0486. If, on the other hand, bulls are able to regain control of the short-term ceiling at $1.07, some respite could be seen.

Source: Spreadex

Key Takeaways

US CPI figures for January are expected to break from recent trends, with headline inflation coming down to 6.3% and core to 5.4%. The data could provide some vindication for the Fed as inflation has slowed faster than in Europe. It may also provide some impetus for the ECB to keep tightening as European interest rates are much lower than those in the US. A tight jobs market could lead to more inflation down the road, and if inflation comes down less than expected, the Fed could hike more than anticipated. EUR/USD appears to be in a flag correction that could spiral downward if a move above $1.08 is not made.