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US CPI data to move the Dollar dial

FX markets are in consolidation mode ahead of the key risk event of the week, tomorrow’s US CPI data.

Several currency majors printed inside days yesterday which denote a pause for breath with the day’s range “inside” the prior day’s range.

Wage growth figures in the monthly NFP data last week soothed markets nerves over higher rates in the US.

The inflation figures are seemingly on a downtrend. But how fast they fall or if they are sticky will determine market direction for the dollar and risk assets in general ahead of February’s FOMC meeting.

Consensus predicts the headline CPI reading falling to 6.5% from 7.1% in November.

That would be the sixth month in a row that the data has declined from the June peak of 9.1%. It would also mark the lowest reading in 13 months.

This encouraging news on previously rampant price pressures is now pointing to the end of the Fed’s aggressive rate hike cycle, with money markets currently pricing in nearly 50bp of cuts later this year.

There is roughly a 75% chance of a quarter point rate hike in February with another 25bps of tightening priced by markets into spring.

The last two inflation releases have revealed downside surprises and sparked volatility in equity markets.

At the time of writing, the DXY is currently biding time just below a key support zone around 103.50, a region which also includes the pandemic spike high from March 2020, while dollar bulls and bears also danced around this region back in mid-2022.

The “death cross” has also grabbed attention, that is when the 50-day simple moving average crosses below the 200-day simple moving average.

US CPI data to move the dollar dial

The shock would be a stronger set of data as markets currently don’t appear to need much encouragement to see the dovish side of economic releases at present.

Sticky inflation, helped possibly by still hot shelter costs, would reaffirm the recent Fedspeak that the peak rate will need to go above 5% and stay there for longer.

Seasonals also point to a stronger dollar but the greenback is now down around 10% from its highs last September so all eyes will be on tomorrow’s CPI figures.

 

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