US CPI Preview: Could a HOT Inflation Report Revive a Fed Pause?

US CPI KEY TAKEAWAYS:

• US CPI expectations: 2.6% y/y headline inflation, 3.3% y/y “core” inflation
• The Fed is likely to cut interest rates by 25bps regardless of the inflation reading, though a hotter-than-expected print could certainly raise some questions.
• USD/CAD has broken above the key 1.4100 area, opening the door for another leg higher pending US CPI and the BOC meeting.

When is the US CPI report?

The US CPI report for November will be released at 8:30ET (13:30 GMT) on Wednesday, December 11.

What are the US CPI Report Expectations?

Traders and economists are projecting headline CPI to come in at 2.6% y/y, with the core (ex-food and -energy) reading expected at 3.3% y/y.

US CPI Forecast

The Fed, as always, is focused on both maintaining full employment (mixed results on that front after Friday’s NFP report showed more jobs created than expected but a deterioration in the unemployment rate) and inflation, which has stubbornly stalled in the 3% range after a steep decline in 2022 and 2023. Nonetheless, the majority of Fed speakers in recent weeks have indicated that the central bank is on track to cut interest rates by 25bps at the upcoming December meeting, even if that perspective isn’t necessarily unanimous at this point.

As many readers know, the Fed technically focuses on a different measure of inflation, Core PCE, when setting its policy, but for traders, the CPI report is at least as significant because it’s released weeks earlier. As the chart below shows, the year-over-year measure of US CPI has resumed its decline from the 2022 peak in recent months, though economists are expecting it to bump back up to 2.6% this month:

Source: TradingView, StoneX

As the chart above shows, the “Prices” component of the PMI reports – a key leading indicator for CPI itself – has held its own in the mid-50 region, indicating “sticky” price pressures at a firm level.

Crucially, the other key component to watch when it comes to US CPI is the so-called “base effects,” or the influence that the reference period (in this case, 12 months) has on the overall figure. Last November’s 0.1% m/m reading will drop out of the annual calculation after this week’s reading, opening the door for an increase in the headline year-over-year CPI reading as long as the month-over-month reading comes in higher than that.

US Dollar Technical Analysis – USD/CAD Daily Chart

Source: StoneX, TradingView

Turning our attention to the US dollar, USD/CAD is in a particularly interesting spot ahead of the US inflation report and a Bank of Canada meeting less than two hours later. The pair has been in an uptrend since mid-September and finally broke above confluent Fibonacci resistance near 1.41 on Friday. After retesting that level and seeing a strong bounce on Monday, the technical bias remains to the topside for a potential continuation toward the next Fibonacci level of interest just below 1.4300. Meanwhile, only a big reversal to break below 1.4100 and the rising trend line around 1.4050 would erase the near-term bullish bias.

-- Written by Matt Weller, Global Head of Research

Check out Matt’s Daily Market Update videos on YouTube and be sure to follow Matt on Twitter: @MWellerFX