US CPI Preview: Dollar will attempt to stage a relief rally on absence of soft inflation reading – MUFG

USD softens ahead of release of latest US Consumer Price Index (CPI) report. Economists at MUFG Bank analyze how the Dollar could react to inflation data.

Will US CPI report support expectations for imminent rate cut?

Unless there is a significant upside surprise in today’s CPI report today, the slowing inflation trend should encourage the Fed to begin cutting rates giving it more confidence that inflation is falling back towards their target.

Even though inflation has been slowing during the 2H of last year, USD performance immediately following the release of CPI reports has been mixed recently. The US Dollar Index (DXY) strengthened by +0.3% in the first hour after the last US CPI report was released on 12th December and has strengthened three times in the first hour following the release of the last six US CPI reports.

The clearer trend is that the USD has moved more in percentage terms in response to the last three US CPI reports highlighting that inflation readings are becoming more important with Fed policy at a pivot point.

With the US interest rate market still pricing in around 18 bps of Fed cuts by March, another softer inflation reading will be required today to meet expectations for an early rate cut otherwise the Dollar will attempt to stage a relief rally.