Investors: Eyes on US CPI Inflation

Highlights:

• Yen traders will be looking for clues about the BoJ’s exit in Tokyo CPI and wages.
• Sentiment will be influenced by China’s inflation and trade figures.
• UK monthly GDP to be released amid recession concerns.
• The next big test for the US dollar will be the US CPI inflation report.

The US dollar recovered from its initial losses during the week of January 1. Market participants reduced their expectations for the number of rate cuts by December, although investors still expect much more than the amount indicated in the dot plot. At the press briefing following the meeting, Jerome Powell, the Chair of the Federal Reserve, appeared more dovish. The median dot for 2024 had been lowered to 4.6% from 5%.

He noted that the base case for rate increases has changed. He said that it is now time to start considering when it is appropriate to reduce the rates.

Last week, investors were expecting the Fed to deliver a 25 basis point reduction in March and another 160 basis points in December. The probability of a March reduction has since dropped to around 70%.

Investors will be keeping an eye on the US CPI data for December, which will be released on Thursday.

The decline in inflation has been swift, as it has been brought down by falling prices for various goods and services, such as travel.

The decline in headline inflation was faster than that of underlying prices in September. Energy prices started to recede in September, which erased most of the gains that were made during the summer.

Since the downtrend in 2022 has ended, oil prices have moved closer to their opening levels in 2023. This means that the year-on-year change in the CPI has moved from negative to zero. With the headline rate resting comfortably below the core one, there is a chance that inflation will bounce back.