US CPI Preview: Sticky Inflation to Keep the Fed on Hold Until the Summer?

US CPI KEY TAKEAWAYS:

• US CPI expectations: 2.5% y/y headline inflation, 2.5% y/y core inflation
• With the Fed likely on hold until the summer, this month’s CPI report may not drive as much immediate market volatility as past releases.
• USD/JPY’s path of least resistance ahead of the weekend may be to the upside as long as inflation meets expectations

When is the US CPI report?

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

What are the US CPI Report Expectations?

Traders and economists are projecting both headline and core (ex-food and -energy) CPI to come in at 0.3% m/m and 2.5% y/y. This reading, if seen, would represent a slight uptick from last month.

US CPI Forecast

In recent months, this report has highlighted that the more urgent side of the Fed’s dual mandate has been the steady deterioration of the labor market, despite the prolonged period of above target inflation. After a (much) stronger-than-expected NFP report earlier this week, the focus may shift gradually back toward inflation as the driving force behind any interest rate changes.

In the wake of Wednesday’s jobs report, traders have adjusted their expectations to anticipating no change of interest rates until the middle of the year, with the odds of a an interest rate cut in March or April falling to just 20%; put another way, traders currently believe that there’s a 4-in-5 chance that the FOMC will remain on hold throughout the rest of Chairman Jerome Powells tenure in May:

Source: CME FedWatch

With monetary policy seemingly in stasis for the near-term, this month’s CPI report may not drive as much immediate volatility as it has when the Fed’s interest rate expectations have been more in flux.

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 we noted above, CPI has generally held steady in the upper-2% range for the past six months, remaining stubbornly above the Fed’s 2% target:

Source: TradingView, StoneX

Looking at the chart above, the “Prices” components of the PMI reports have started to edge back higher recent months, but inflation nonetheless remains below where those readings would historically imply, hinting that there may be limited potential for inflation to fall toward 2% in the immediate term.

US Dollar Technical Analysis – USD/JPY 4-Hour Chart

Source: TradingView, StoneX

USD/JPY is in focus ahead of the CPI report as it’s the pair that typically sees the “cleanest” reaction to US economic data. So far this week, USD/JPY has fallen sharply following a dominating victory for PM Takaichi’s LDP party in last weekend’s snap election, but the pair is approaching longer-term support near the 10-month bullish trend line and last month’s low in the 152.00 area.

Technically speaking, the pair remains in a longer-term uptrend despite this week’s pullback, but that could change with a convincing break below trend line support, a move that could emerge if inflation comes in well below expectations. That said, the path of least resistance ahead of the weekend may be to the upside as long as inflation meets expectations, with little in the way of technical resistance until closer to the 155.00 area.

-- 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