US CPI data Preview: Inflation is set to fall in January, but by how much?

• The US Consumer Price Index is set to rise 3% YoY in January, down from December’s 3.4% increase.
• Annual Core CPI inflation is expected to edge lower to 3.8% in January.
• The inflation report could impact the US Dollar by providing clues as to the timing of Fed policy pivot.

The high-impact US Consumer Price Index (CPI) inflation data for January will be published by the Bureau of Labor Statistics (BLS) on Tuesday at 13:30 GMT. Inflation data could alter the market’s pricing of the Federal Reserve (Fed) policy pivot, fuelling extreme volatility around the US Dollar (USD).

What to expect in the next CPI data report?

Inflation in the United States (US) is forecast to rise at an annual pace of 3% in January, a tad softer than the 3.4% increase reported in December. The Core CPI inflation rate, which excludes volatile food and energy prices, is forecast to tick down to 3.8% from 3.9% in the same period.

The monthly CPI and the Core CPI are seen increasing 0.2% and 0.3%, respectively.

The BLS announced on Friday that it revised the monthly Consumer Price Index (CPI) increase for December lower to 0.2% from 0.3%. The Core CPI was unrevised at 0.3% for the same period. On the other hand, November's CPI increase was revised higher to 0.2% from 0.1%, while October's 0.1% growth was left unchanged. The BLS noted that CPI revisions reflect the new seasonal adjustment factors.

In January, Oil prices rose more than 6% on growing concerns over a supply shock due to the ongoing crisis in the Red Sea. Meanwhile, Manheim Used Vehicle Index was unchanged in the same period. Previewing the inflation report, “We look for core inflation to stay relatively unchanged at 0.3% m/m in January, with the headline likely slowing a tenth to 0.1%,” said analysts at TD Securities. “Our unrounded core CPI forecast at 0.27% m/m suggests it will be a close call between a 0.2% and a 0.3% gain. The report is likely to show that used vehicle prices were a large drag on inflation, while OER/rents are expected to move sideways.”

How could the US Consumer Price Index report affect EUR/USD?

Following the impressive labor market data for January, markets have shifted their view on the timing of the Federal Reserve’s (Fed) policy pivot and refrained from pricing in a rate cut in March. According to the CME FedWatch Tool, the probability of the Fed leaving the policy rate unchanged at the next meeting is stronger than 80%.

At this point, it will take a significant downward surprise, a negative print, in the monthly Core CPI data for markets to reconsider the possibility of a rate reduction in March. In this scenario, US Treasury Bond yields could turn south and weigh on the US Dollar (USD). On the other hand, a stronger-than-forecast increase in this data could have a short-lasting positive impact on the USD’s performance against its rivals.

Markets are still unsure whether the Fed will opt for a rate cut in May. Between now and the policy announcement in May, there will be two more sets of employment and inflation data. Hence, investors might refrain from taking large positions based on January inflation figures and wait to see how the economy evolves in the next couple of months.  

Eren Sengezer, European Session Lead Analyst at FXStreet, offers a brief technical outlook for EUR/USD and explains: “EUR/USD holds steady at around 1.0800, where the 100-day Simple Moving Average (SMA) and the Fibonacci 50% retracement of the October-December uptrend align. In case the pair fails to stabilize above that level, 1.0700 (Fibonacci 61.8% retracement) could be seen as next support before 1.0660 (static level) and 1.0600 (psychological level).

“On the upside, the 200-day SMA forms stiff resistance at 1.0840 ahead of 1.0900 (psychological level) and 1.0950 (Fibonacci 23.6% retracement).”