US CPI data Preview: Headline inflation seen steady in February on increasing gas prices, core to decline

• The US Consumer Price Index is set to rise 3.1% YoY in February, matching January’s increase.
• Annual Core CPI inflation is expected to edge lower to 3.7% in February.
• The inflation report could provide fresh clues as to the timing of the Fed policy pivot.

The high-impact US Consumer Price Index (CPI) inflation data for February will be published by the Bureau of Labor Statistics (BLS) on Tuesday at 12:30 GMT. Inflation data could alter the market’s pricing of the Federal Reserve (Fed) policy pivot, ramping up 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 3.1% in February, matching the increase recorded in January. The Core CPI inflation rate, which excludes volatile food and energy prices, is forecast to tick down to 3.7% from 3.9% in the same period.

The monthly CPI and the Core CPI are seen increasing 0.4% and 0.3%, respectively.

In his semi-annual testimony before the US Congress, Federal Reserve Chairman Jerome Powell said that the economic outlook was uncertain and that the ongoing progress toward the 2% inflation goal was not assured. Regarding the policy outlook, Powell reiterated that it will likely be appropriate to begin lowering the policy rate at some point this year but added that they would like to have greater confidence inflation will move sustainably toward 2% before taking action.

Previewing the February inflation report, “we expect next week's CPI report to show that core inflation slowed to a 0.3% m/m pace in February after posting an acceleration to 0.4% in the last report,” said TD Securities analysts in a weekly report. “Despite slowing, our m/m projection would keep the core's 3-month AR pace unchanged at a still elevated 4.0%. Note that our unrounded core CPI forecast at 0.31% m/m suggests balanced risks between a 0.2% and a 0.4% gain.”

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

The Consumer Price Index (CPI) data for January showed that the disinflationary trend slowed down. The annual CPI and the Core CPI rose at a slightly stronger pace than in December. The positive impact of these readings on the US Dollar (USD), however, remained short-lived because markets were already anticipating a delay in the Fed policy pivot following the impressive labor market data for January. After rising 0.7% and touching its highest level since mid-November near 104.00 on the day of the January CPI release (February 13), the USD Index (DXY) went into a downtrend. 

Markets are currently pricing in a nearly 75% probability that the Fed will lower the policy rate in June, according to the CME FedWatch Tool. Although February CPI figures are unlikely to alter the market positioning in a significant way, a stronger-than-forecast increase in the monthly Core CPI could help the USD stage a rebound against its rivals with the immediate reaction. Investors could see such data as an opportunity to unwind USD shorts following the previous week’s sell-off.

On the other hand, a monthly Core CPI print at or below the market consensus of 0.3% could reaffirm June as the month of the policy pivot. The market positioning, however, suggests that the USD doesn’t have a lot of room left on the downside. In this scenario, the USD could weaken in the initial reaction, but an extended sell-off could be hard to come by unless it’s accompanied by a risk rally in US stocks or a sharp decline below 4% in the benchmark 10-year US Treasury bond yield.

Eren Sengezer, European Session Lead Analyst at FXStreet, offers a brief technical outlook for EUR/USD and explains: “The Relative Strength Index (RSI) indicator on the daily chart edged lower after coming within a touching distance of 70, suggesting that investors are taking a break before betting on another leg higher in EUR/USD. On the upside, 1.0960 (Fibonacci 23.6% retracement level of the October-December uptrend) aligns as interim resistance ahead of 1.1000 (psychological level, static level). If the pair manages to stabilize above the latter, 1.1100 (end-point of the uptrend) could be set as the next bullish target.”

“Looking south, strong support seems to have formed at 1.0830-1.0840, where the 100-day and the 200-day Simple Moving Averages (SMA) are located. A daily close below this support area could open the door for an extended correction toward 1.0800.”