Investors Continue to Monitor Inflation to Determine Fed’s Hike Path

As investors assess the economic outlook, European markets are expected to open muted on Tuesday morning. U.S. consumer price index data, set for release on Tuesday, will determine whether the Federal Reserve opts for further monetary policy tightening. Europe and Japan are also set to release key data later in the week. On Tuesday, Asia-Pacific markets traded mixed as Japan reportedly announced its nomination of Kazuo Ueda as the new Bank of Japan governor, who is set to succeed Haruhiko Kuroda, if confirmed by the country’s parliament.

Pan-European Stoxx 600 Index Closes Higher with Household Goods Leading Gains

On Monday, the pan-European Stoxx 600 index closed 0.9% higher, with most sectors and major bourses finishing in positive territory. Household goods led gains with a 2% increase, while oil and gas stocks slipped 0.2%. Meanwhile, U.S. stock futures ticked lower on Tuesday morning as investors looked ahead to key inflation data.

Modest Fall in US Treasury Bond Yields ahead of US inflation figures

All eyes on Tuesday will be on the release of the Labor Department’s consumer price index, a widely followed inflation gauge. Economists are expecting that the CPI will show a 0.4% increase in January, which would translate into 6.2% annual growth. However, there’s some indication that the number could be even higher. The Federal Reserve is determined to keep fighting inflation, so the report could harden its position.

The U.S. dollar retreated in early European trade on Tuesday ahead of the latest readout of U.S. consumer inflation, while the yen gained upon the nomination of the next governor of the Bank of Japan. Markets are also wary of any potential bigger-than-expected surprises in core inflation, which excludes volatile energy and food prices, as the labour market remains strong, potentially powering wage growth. If the reading is hotter than expected, there are potentially important investing implications.

Fed Monitors Inflation

Fed policymakers are watching the CPI and a host of other data points for clues on whether a series of eight interest rate increases are having the desired effect of cooling inflation that hit a 41-year high last summer. If it turns out that monetary tightening isn’t working, it could force the Fed into a more aggressive posture.

The market focus will remain glued to the release of the crucial US CPI report. The data will play a key role in influencing the Fed's rate-hike path, which, in turn, will drive the USD demand. The University of Michigan survey's one-year inflation expectations climbed to 4.2% this month from 3.9% in January, further raising expectations of a hawkish stance from the Fed. A modest fall in the US Treasury bond yields, along with a positive turnaround in the risk sentiment, exerted some downward pressure on the safe-haven Greenback. That said, expectations that the Federal Reserve will stick to its hawkish stance should help limit the downside for US bond yields and the buck.

Traders Take Cues from Preliminary Readings of Eurozone GDP as Key Data Risk Looms

Heading into the key data risk, traders on Tuesday will take cues from the preliminary readings of the fourth quarter (Q4) Eurozone Gross Domestic Product (GDP). While the second estimate is unlikely to provide any meaningful impetus, any disappointment will spark recession fears and weigh on the shared currency. Apart from this, the USD price dynamics should contribute to producing short-term trading opportunities around the EUR/USD pair.