US Consumer Price Index set to show steady inflation, Federal Reserve unlikely to rush rate cuts
- The US Consumer Price Index is seen rising 2.9% YoY in January.
- The core CPI inflation should remain sticky well above the Fed’s goal.
- Investors have so far pencilled in a Fed rate cut in June.
The United States (US) Bureau of Labor Statistics will release January’s Consumer Price Index (CPI) report on Wednesday at 13:30 GMT.
As a key indicator of inflation, this report might influence the US Dollar’s (USD) price action in the short-term horizon, although it’s not expected to lead to any immediate changes in the Federal Reserve’s (Fed) monetary policy stance.
What to expect in the next CPI data report?
All eyes will be on the upcoming inflation numbers in the US.
That said, the Consumer Price Index (CPI) is expected to show an annual increase of 2.9% in January—matching the previous month’s reading. When you strip out the volatile food and energy prices to get a clearer picture, the core CPI is predicted to still remain above the Fed’s target at 3.1% compared to a year ago. On a monthly basis, forecasts point to a 0.3% bump in both metrics.
Previewing the report, analysts at TD Securities noted: “We look for core CPI inflation to accelerate in January following a softer than expected 0.23% m/m gain in December. The typical Q1 price resets are likely to play a role, with services inflation picking up sequential strength. On a y/y basis, headline CPI inflation is expected to stay unchanged at 2.9%; likewise for core inflation which likely remained elevated at 3.2% y/y”.
Returning to the Fed’s hawkish stance at its January 28-29 meeting, it is worth noting that the Committee removed the reference to inflation “has made progress” towards the 2% target from its statement.
Later, during his usual press conference, Chair Jerome Powell argued that the Fed would only consider further cuts once it observed real progress on inflation or signs of weakness in the labour market. He also mentioned that it had become increasingly challenging to predict the direction of inflation, partly due to growing uncertainty about which policies President Donald Trump might adopt and how quickly those measures would impact the economy.
How could the US Consumer Price Index report affect EUR/USD?
Uncertainty about tariffs and trade policy under the Trump administration remains high and has been weighing on the US Dollar (USD) in recent days, allowing for a modest recovery in risk-linked assets at the expense of the US Dollar Index (DXY).
Meanwhile, although the latest US Nonfarm Payrolls report showed that the economy added fewer jobs than expected in January, it did note a decline in the jobless rate to 4.0% along with steady wage inflation indicators—factors that support the view of a healthy and resilient domestic labour market.
This, combined with stubborn inflation and the Fed’s cautious stance, should keep the Greenback’s constructive outlook unchanged for the time being.
Regarding the Fed, market participants now anticipate that the central bank will resume its easing cycle in June, with another quarter-point reduction already penciled in.
Turning to EUR/USD, Pablo Piovano, Senior Analyst at FXStreet, shared his technical outlook. He identified the February low of 1.0209, reached on February 3, as the immediate area of contention. Losing this level could bring a potential drop to the 2025 bottom of 1.0176 (recorded on January 13) back into focus before the pair approaches the psychological parity mark of 1.0000.
On the upside, resistance is seen at the 2025 high of 1.0436 (from January 6), further supported by the December top of 1.0629 (from December 6), an area reinforced by the interim 100-day SMA.
Piovano also noted that the bearish outlook for the pair should remain in place as long as it trades below the critical 200-day SMA at 1.0752.
In addition, the daily Relative Strength Index (RSI) has receded to the 43 level, indicating a loss of momentum, while the Average Directional Index (ADX) hovering around 18 denotes a weak trend.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
