US CPI report at 1:30 pm GMT may provide significant insights into the Fed’s monetary policy outlook
The Consumer Price Index data report is scheduled for release at 1:30 pm GMT. Annualized inflation is expected to ease further, therefore monthly CPI data will draw more attention, as it is likely to rebound and emerge as a cause for concern for the Federal Reserve.
Although inflation has shown signs of peaking at 9.1% in June last year, it remains more than three times above the Fed's 2% target and continues to point to a broad-based advance on the general price level, particularly services and housing.
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Create account Try a demo Download mobile app Download mobile appIt is expected that today's data will show a deceleration in headline price growth from 6.5 to 6.2% YoY while core gauge is seen dropping from 5.7 to 5.5% YoY. On a monthly basis, the CPI is forecast to increase to 0.5% mainly due to higher energy prices and rebound of used car prices, while the Core CPI is expected to remain at 0.4% as rent prices are still elevated.
Markets are somewhat positioning for a slightly hotter-than-expected CPI reading, given strong labor market data for January. Median forecasts point to a significant slowdown in both headline and core annual gauges. On the other hand, expectations for month-over-month readings do not look so rosy. Source: xStation5
The used car prices in the US resumed an upward move in January. Source: Bloomberg via Manheim
Taking a look at energy prices we can see that those dropped significantly at the end of 2022, however rebounded slightly in January, therefore impact of recent declines may be limited on today's report.
Fuel prices continue to point to a possible decline in inflation, but the short-term impact of cheaper gasoline may be limited. Source: Bloomberg, XTB Research
The Fed is currently focusing on services inflation, excluding the real estate market, which still remains elevated and leaves some room for surprise. Source: Bloomberg, XTB Research
A softer-than-expected reading would reinforce bets that the Federal Reserve could bring a pause to its policy tightening beginning from Q2 2023, which would prompt fresh selling around the US Dollar. On the other hand, even a slight setback could be a major blow and leave at least two more hikes, maybe more, on the cards. Any meaningful divergence from the expected readings should infuse some volatility in the markets and allow traders to grab short-term opportunities around the USD pairs and futures linked to US indices.
According to JPMorgan these are potential scenarios on how the S&P 500 may react after CPI release:
- CPI below 6% - S&P 500 moves up by 2.5%-3%
- CPI 6.0%-6.3% - S&P 500 moves up by 1.5%-2%
- CPI 6.4%-6.5% - S&P 500 moves down by 0.75%-1.5%
- CPI above 6.5% - S&P 500 moves down by 2.5%-3%
US500 once again approaches key resistance at 4175 pts, which coincides with 23.6% Fibonacci retracement of the upward wave launched in March 2020 and upper limit of the 1:1 structure. Also medium-term 100-day EMA (purple line) recently crossed above the long-term 200-day SMA (red line). This formed a bullish ‘golden cross’ formation, which can at times precede a move higher. Nevertheless as long as price sits below the aforementioned resistance, another downward wave may be launched towards crucial support at 4000 pts. However if bulls manage to uphold recent momentum, then upward move may accelerate towards highs from August 2022 around 4335 pts. Source: xStation5
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