This Week: Softer CPI to push USD Index into “death cross”?

Last Friday’s “goldilocks” US jobs report – robust hiring accompanied by moderating earnings growth – has fuelled hopes that the Fed can truly engineer a “soft landing” for the world’s largest economy.

Such expectations are set to frame this week’s closely-watched US inflation print, amongst these other economic data releases and events across major economies:

Monday, January 9

• EUR: Eurozone November unemployment; Germany November industrial production
• GBP: BOE’s Huw Pill speech
• USD: Atlanta Fed President Raphael Bostic speech
   

Tuesday, January 10

• GBPUSD: Speeches by Fed Chair Jerome Powell and BOE Governor Andrew Bailey
• World Bank set to release global economic prospects report
   

Wednesday, January 11

• AUD: Australia November inflation and retail sales

Thursday, January 12

• AUD: Australia November external trade
• CNH: China December CPI and PPI
• USD: US December CPI; weekly initial jobless claims
• USD: Fed speak – Speeches by St. Louis Fed President James Bullard, Richmond Fed President Thomas Barkin

Friday, January 13

• CNH: China December external trade
• GBP: UK November GDP, industrial production, trade balance
• EUR: Eurozone November industrial production
• USD: US January consumer sentiment
• S&P 500: US earnings season kicks off

 

Overall, the US dollar could be dragged even lower if the headline inflation figure confirms the ongoing downtrend in price pressures.

After all, if inflationary pressures, a.k.a the Fed’s enemy #1, is losing its potency, then the US central bank would have less reason to keep hiking interest rates aggressively.

Wall Street economists estimate that the December consumer price index (CPI) rose by “only” 6.5%.

If so, that 6.5% figure would be:

• Slower than November 2022’s 7.1%
   
• Significantly-lower than June 2022’s 9.1% which was a 40-year high.
   
• The slowest pace since November 2021 (6.8%)

 

For the cautious investor, 6.5% still marks more than three times the Fed’s official 2% target.

Yet the dollar is set to get more downcast if the pace of the headline CPI’s downtrend gathers steam.

 

USD Index tests critical support as 50-day SMA threatens to cross below 200-day SMA

At the time of writing, the USD Index is testing a crucial Fibonacci level for support, with the 1.7085 level marking the 38.2% retracement line from 2022’s peak to trough.

A lower-than-6.5% CPI print later this week may see this equally-weighted USD Index submerging into sub-1.16 territory for the first time since August, while likely sealing a “death cross” – where its 50-day simple moving average (SMA) crosses below its 200-day counterpart.

Such a technical event often signals more price declines, which may compound the US dollar’s pains as we progress through 2023, provided the Fed truly eases up on its hawkish stance, and perhaps even embarks on a policy pivot (rate cut) later this year.