US CPI data set to highlight inflation eased in February but remains stubborn
- The US Consumer Price Index is forecast to rise 2.9% YoY in February.
- The core CPI inflation is seen a tad lower at 3.2% last month.
- The inflation data could impact the US Dollar’s value and the Fed’s cautious policy stance.
The United States (US) Bureau of Labor Statistics (BLS) is set to publish the high-impact Consumer Price Index (CPI) inflation report for February on Wednesday at 12:30 GMT.
The CPI figures could notably impact the US Dollar (USD) and the Federal Reserve’s (Fed) cautious monetary policy stance.
What to expect in the next CPI data report?
As measured by CPI, inflation in the US is set to rise at an annual pace of 2.9% in February, down slightly from 3.0% reported in January. Core CPI inflation, which excludes the volatile food and energy categories, is expected to ease to 3.2% in the same period from a year earlier, compared to a 3.3% growth in January.
On a monthly basis, a 0.3% increase is projected for the headline CPI and the core CPI inflation figures.
Previewing the report, analysts at TD Securities noted: “We expect core CPI inflation to cool down in February following the January jump to 0.45%, as price resets came in firmer than expected in the services segment. We look for slowing in both the goods and services segments, with owners' equivalent rent (OER) inflation dropping to a 3-month low.”
“On a year-over-year (YoY) basis, headline and core CPI inflation are likely to drop by a tenth each to 2.9% and 3.2%, respectively,” TDS analysts said.
How could the US Consumer Price Index report affect EUR/USD?
Against mounting US economic slowdown concerns and President Donald Trump-led global tariff war, markets are now pricing in 85 basis points (bps) of easing from the Fed this year, compared to 75 bps on Monday, per the LSEG Fed interest rate probabilities.
The recent slew of US data releases has been quite discouraging, especially with the February Nonfarm Payrolls (NFP) report on Friday showing that the US economy added 151,000 jobs in February, compared with an expected rise of 160,000 and a previous downward revision of 125,000. The Unemployment Rate climbed to 4.1% versus expectations of 4%. The Labor Force Participation Rate ticked a tad lower to 62.4% in the same period from January’s 62.6%.
On the other hand, Fed Chair Jerome Powell stated on Friday that the US central bank would take a cautious approach to monetary policy easing, adding that the economy currently "continues to be in a good place".
Therefore, stakes are high heading into the US CPI showdown as the inflation report could shed fresh light on the direction of the Fed’s interest rates and the USD.
A bigger-than-expected cooldown in the annual headline and core inflation prints could shake off concerns over risks to the disinflation path, compelling Fed to resume rate cuts while exacerbating the Greenback’s pain.
Conversely, the US dollar would find renewed demand if the US CPI data surprises the upside. This scenario would justify the Fed’s prudence on inflation and policy outlooks, reviving hawkish Fed expectations.
Dhwani Mehta, Asian Session Lead Analyst at FXStreet, offers a brief technical outlook for EUR/USD and explains: “EUR/USD’s near-term technical picture points to a likely buyer exhaustion as the Relative Strength Index (RSI) indicator on the daily chart sits within the overbought territory above 70. However, any pullback could be quickly bought into as a 21-day Simple Moving Average (SMA) and 100-day SMA Bull Cross remains in play.”
“EUR/USD needs acceptance above the November 6 2024 high of 1.0937 to extend the uptrend toward the 1.1000 psychological level. The next relevant bullish targe is seen at the 1.1050 mark. Conversely, the immediate support is at the 200-day SMA at 1.0721, below which the March 5 low of 1.0602 will be tested. The 21-day SMA at 1.0546 will be buyers' last defence.”
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.
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