Can The Dollar Be Saved by Shock US Inflation Data?

Written on 10/01/2023 by Lukman Otunuga, Senior Research Analyst at FXTM

Next Rate Hike Will Be Crucial for US Dollar

After last week’s jolt from the “Goldilocks” US employment data and sub-50 ISM Services reading, we get the latest US CPI figures released on Thursday. This report has been a trigger for volatility over the past year or so and we should expect more of the same to kick off 2023. Crucially, it is also the last set of CPI inflation numbers before the next Fed meeting at the start of February so will inform policymakers about their decision to hike rates by 25bps or 50bps. This may then determine if the dollar carves out new lows or find some buyers.

Keep An Eye on US Inflation Data

Consensus forecasts the headline reading falling to 6.5% from 7.1% in November. That would be the sixth month in a row that the data has declined from the June peak of 9.1%. It would also mark the lowest reading in 13 months. This encouraging news on previously rampant price pressures is now marking the end of the Fed’s aggressive tightening cycle, with money markets currently pricing in nearly 50bp of cuts this year and a further 150bp in 2024.

Interestingly, the first half of 2022 saw a series of consensus-beating CPI reports as Wall Street consistently underestimated the scale of soaring prices. But the tide appears to have turned with the last two releases printing way below forecasts. The speed of the fall in price pressures is crucial as this may guide how much further the FOMC must hike in the near term. The Fed is keen to see inflation on a sustained downward path, so an in-line or softer print should seal the deal on a smaller rate hike next month and could push the dollar to fresh cycle lows.

The shock would be a stronger set of data as markets currently don’t appear to need much encouragement to see the dovish side of economic releases at present. Sticky inflation, helped possibly by still hot shelter costs would reaffirm the recent Fedspeak that the peak rate will need to go above 5% and stay there for longer. The ailing dollar should find a bid in this scenario with the psychological 103 level on the DXY acting as strong support.

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