The forthcoming US Consumer Price Index (CPI) report, set for release on Tuesday, February 13, is generating significant market interest. It is predicted to provide insights into the current state of inflation and the Federal Reserve's rate decision timeline.
Monday saw a little increase in the value of the dollar as the start of a potentially busy week was muted by holidays in most major Asian markets. All eyes were on US inflation statistics for signals about when the Federal Reserve would begin reducing interest rates.
Soft CPI and soft retail sales should help boost the Fed's confidence that inflation is coming back to its target
Marc Chandler, Foreign Exchange Market Analyst
Dollar Impact on US CPI
In response to investors' anticipation of US retail sales and inflation data this week, which might provide insight into the timing of the Federal Reserve's much-anticipated interest rate reductions, the dollar saw a little increase against other major currencies on Monday. The US Dollar Index (DXY) has been closely tracking the inflation data, as the currency's value is heavily influenced by interest rate differentials and global economic conditions.
A lower-than-expected CPI reading could potentially weaken the dollar, making US assets less attractive to foreign investors, while a higher-than-expected number may strengthen it. The Federal Reserve has indicated that inflation should decrease significantly before considering rate cuts. Therefore, if the anticipated decline in inflation materializes, it could reduce the likelihood of a March rate cut and potentially delay further reductions until later in 2024.
Economic Data Impact on US Dollar
Wall Street analysts anticipate that the CPI will increase 2.9% year over year, which is a decrease from 3.4% in the previous month. Additionally, it is anticipated that the core CPI's year-over-year rise in January decreased to 3.7% from 3.9% in the previous month.
The euro was down 0.14% at $1.0769, easing off a 10-day high that was briefly achieved in early trade. This comes after consistent drops in 2024 were followed by a little rebound last week. On Wednesday, a report on the fourth-quarter economic growth in the eurozone may provide new guidance. The Japanese yen slightly appreciated to 149.01 per dollar as the coming release of US CPI data for January on Tuesday limited movements. However, the pound fell 0.1% to $1.2632.
Bitcoin reached $50,000 in cryptocurrency for the first time since December 2021 because of investments made in exchange-traded funds that are backed by the virtual commodity. At $50,207, it was last up 5.6%. With the recent surge in Bitcoin price, digital currency enthusiasts will closely monitor its performance as it relates to traditional financial markets and economic data releases this week.
Dollar/yen is likely to be driven mainly by US developments in the near future, but intervention warnings are likely to increase in frequency around the 150 level
Barclays analysts
In addition to CPI data, other economic indicators, such as retail sales and producer prices, are also scheduled for release this week. Positive data could reinforce expectations of a stronger economy and the likelihood of further rate hikes, pushing the dollar higher.
ECB and BOE Rate Decisions
Meanwhile, central banks like the Bank of England and the European Central Bank (ECB) are also expected to release their interest rate decisions this week. A more aggressive stance from either of these central banks could impact investor sentiment towards the US dollar.
Both the Euro and Pound are likely to face significant market movements this week based on their respective economic data releases and central bank decisions. The Euro could see direction from a fourth-quarter GDP reading, while the pound might be influenced by UK inflation and retail sales figures.
Market volatility is expected as a result of the upcoming data releases and central bank decisions. It's essential for traders to manage risk accordingly by utilizing stop-loss orders, position sizing, and diversification strategies.