US CPI Preview: Is USD/JPY Picking Up a Faint Scent of Stagflation?

US CPI KEY TAKEAWAYS:

• US CPI expectations: 2.9% y/y headline inflation, 3.2% y/y core inflation
• With a Q1 “growth scare” spooking investors and policymakers, there’s now a legitimate chance (~40% per CME FedWatch) that the Fed will cut interest rates in May.
• USD/JPY is testing a logical support zone for a bounce if we see an as-expected or hotter-than-expected inflation reading.

When is the US CPI report?

The US CPI report for February will be released at 8:30ET (13:30 GMT) on Wednesday, March 12.

What are the US CPI Report Expectations?

Traders and economists are projecting headline CPI to come in at 2.9% y/y, with the core (ex-food and -energy) reading expected at 3.2% y/y.

US CPI Forecast

For most of the past few years, the Federal Reserve and other policymakers were almost exclusively focused on reining in the highest inflation that the US had seen in decades.

While price pressures remain the Fed’s primary focus in the current environment, we would be remiss not to highlight the subtle but steady deterioration in the labor market over the last couple months, highlighted by last week’s below-expectation Non-Farm Payroll (NFP) reading.

Against the broader backdrop of a Q1 “growth scare”, there’s now a legitimate chance (~40% per CME FedWatch) that the Fed will cut interest rates in May:

Source: CME FedWatch

That said, traders are still confident the US central bank will leave interest rates unchanged at its meeting later this month, so the volatility around this week’s inflation reading may be somewhat limited, as the Fed will, in all likelihood, still get couple handful of inflation (and jobs) reports before making any additional changes to interest rates.

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. Crucially, the year-over-year measure of US CPI has now risen for four straight months after ticking just below 2.5% back in September:

Source: TradingView, StoneX

As the chart above shows, the “Prices” component of the PMI reports has been rising consistently over the last several months. Despite signs of slowing economic growth, firms are having to pay up for goods and services amidst the ongoing uncertainty around tariffs and the potential for a trade war, potentially putting upward pressure on the CPI report itself in the coming months. From a policy perspective, the combination of weak/contracting growth and elevated inflation is the worst possible “stagflation” scenario that can be difficult for the Fed to handle.

Crucially, the other key component to watch when it comes to US CPI is the so-called “base effect,” or the influence that the reference period (in this case, 12 months) has on the overall figure. Last January’s 0.4% m/m reading will drop out of the annual calculation after this week’s print, opening the door for a decrease in the headline year-over-year CPI reading if the month-over-month reading is less than 0.3%.

US Dollar Technical Analysis – USD/JPY Daily Chart

As we’ve noted before, USD/JPY is the currency pair that tends to have the “cleanest” or most logical reaction to US data. From a technical perspective, the currency pair has been trending consistently lower since peaking near 159.00 in early January.

As of writing, the pair is testing potential support at the confluence of the bottom of its descending channel and the 61.8% Fibonacci retracement near 147.00, pointing to the potential for a bounce if the CPI report comes in at or above expectations. The ongoing bullish divergence in the 14-day RSI (lower lows in price, similar lows in the indicator) strengthens the case for a bounce from a purely technical perspective.

-- Written by Matt Weller, Global Head of Research

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