Where Will the USD Head After the Inflation Report?
This week the data has been light and markets have been relatively quiet compared to previous weeks, but that’s due to the US consumer price index report which will be released later today, and will likely get markets moving when the December numbers are released. Expectations are mixed, for an increase in the headline CPI and a decline in core CPI, but the actual numbers will decide.
The market has largely progressed from the inflation argument, since it is becoming increasingly evident that we are getting back fast to a period of low inflation and low growth. However, inflation is still important for traders since the FED continues to watch this report and the PCE report closely. Everyone has clearly agreed in the last few months that inflation is falling, but there is still a significant gap between 3% inflation and say, a 1.8% environment.
The headline monthly number will be the first to receive attention, with the consensus at +0.2%, but if you look at the predictions by major players, they point to +0.25%, thus we might see a beat and a +0.3% reading. The YoY predictions are shown below with large banks anticipating a deviation of up to 0.2% higher, whereas smaller banks expect lower reading.
US December CPI Inflation Forecasts
If inflation follows major banks’ predictions, then the USD will likely run higher for some time, but the expected and the prior numbers provide evidence that progress on core inflation has paused, so traders might be expecting slightly hgiher numbers. So, any positive surprise will likely give the USD a push higher initially, perhaps by 100 pips or even 200 pips at most, but it will be forgotten by the market within the next day since inflation is coming down indeed and lower Oil prices will help the price fall further. However, we will follow the report and the reaction, trying to get some pips out of this.
USD/JPY Live Chart
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