Breaking: US annual CPI data declines to 6.4% in January vs. 6.2% expected

The US Bureau of Labor Statistics reported on Tuesday that inflation in the United States, as measured by the Consumer Price Index (CPI), declined to 6.4% on a yearly basis in January from 6.5% in December. This reading came in higher than the market expectation of 6.2%. On a monthly basis, the CPI was up 0.5%, matching analysts' estimate.

The Core CPI, which excludes volatile food and energy prices, rose 0.4% on a monthly basis as expected, bringing the annual rate down to 5.6% from 5.7%.

Market reaction

With the initial reaction, the US Dollar (USD) came under heavy selling pressure. As investors assess how January inflation figures could influence the Federal Reserve's (Fed) rate outlook, however, the USD's losses remain limited for the time being. At the time of press, the US Dollar Index was down 0.55% on the day at 102.74.

Meanwhile, the benchmark 10-year US Treasury bond yield was last seen losing nearly 1% on the day at around 3.67%.

Follow our live coverage of the market reaction to US inflation data.

"The index for shelter was by far the largest contributor to the monthly all items increase, accounting for nearly half of the monthly all items increase, with the indexes for food, gasoline, and natural gas also contributing," the BLS noted in its publication. "The food index increased 0.5 percent over the month with the food at home index rising 0.4 percent. The energy index increased 2.0 percent over the month as all major energy component indexes rose over the month."

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• US Consumer Price Index monthly consensus number for January is 0.5%, up from 0.1% in December.
• Monthly Core CPI expected to remain at 0.4%, any surprise here will highly impact markets.
• US Dollar extremely sensible to inflation, the most important macro data for Federal Reserve.
  

The US Consumer Price Index (CPI) is expected to rise in January in line with market expectations. The data released by the US Bureau of Labor Statistics (BLS) will come out on Tuesday, February 14 at 1:30 pm GMT and may have an effect on the recent uptrend in the US Dollar (USD), seen since the last employment report.

The United States (US) inflation report will be published after the February Federal Reserve policy decision and could significantly impact the USD valuation.

Pick-up in US CPI monthly data should not change declining YoY trend

On a yearly basis, the CPI data is forecast to decline to 6.2% in January from December’s 6.5%. The Core CPI, which excludes volatile food and energy prices, is expected to edge lower to 5.5% from 5.7%. On a monthly basis, the CPI is seen rising to 0.5% versus 0.1% previous. Meanwhile, the Core CPI is likely to remain at 0.4%, the same number it posted for December after a late revision of the data.

Investors will closely scrutinize the US CPI report, as it is the most influential macroeconomic indicator to measure consumer inflation, providing significant insights into the Federal Reserve’s monetary policy outlook.

RBC Economics team of analysts emphasizes the declining figures for the year-over-year inflation measurements, which are expected to continue in January: 

“We expect CPI growth edged down to 6.2% in January from 6.5% in December (YoY). Food price growth likely also continued to slow, albeit from very high levels. By contrast, we expect energy price growth to tick up for the first time in 7 months – though to an 8% rate that is still well below a June peak of 42%. We look for core inflation to slow further in January, coming in at 5.4% YoY, down from 5.7% in December. All told, recent inflation reports have pointed to a relatively broadly-based easing in price pressures.”

EUR/USD trading opportunities after US Consumer Price Index

The Consumer Price Index data report is scheduled for release at 13:30 GMT, on February 14. The monthly CPI data will draw more attention, as it is likely to rebound and emerge as a cause for concern for the Federal Reserve. Additionally, the declining trend in the annualized inflation is not seen as a surprise after peaking out at 9.1% in June last year.

A softer-than-expected reading would reinforce market expectations that the Fed could bring a pause to its policy tightening after the first quarter, prompting fresh selling around the US Dollar.

This, in turn, should allow the EUR/USD pair to initiate a meaningful recovery through the 1.0800 mark. In contrast, a surprisingly hot US CPI print could strengthen expectations of more rate increases from the Fed and add legs to the ongoing recovery in the US Dollar.

The US CPI data is likely to set the tone for markets in the coming weeks, in the lead-up to the February employment data and another CPI release before the March Fed policy meeting.

Nevertheless, any meaningful divergence from the expected readings should infuse some volatility in the markets and allow traders to grab short-term opportunities around the EUR/USD pair.

Dhwani Mehta offers a brief technical outlook for the major and explains: “EUR/USD has managed to recover ground above the 50-Daily Moving Average (DMA) on the daily chart in the run-up to the US CPI showdown. The 14-day Relative Strength Index (RSI), however, continues to hold below the midline, warranting caution for the Euro bulls.”

Dhwani also outlines important technical levels to trade the EUR/USD pair: “Buyers need to find acceptance above the 1.0750 psychological barrier to build on the recovery from five-week lows of 1.0655. Further up, the static resistance at 1.0800 will be the level to beat for bulls. On the flip side, if the 50DMA caves in again, then the multi-week low of 1.0655 will be retested. A sustained break below the latter will open floors for a test of the 1.0600 round figure.”

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About the Consumer Price Index

The Consumer Price Index, published by the Bureau of Labor Statistics, is a gauge of the average change in prices of a set basket of goods and services bought by households. The CPI is employed to track changes in the cost of living and is a commonly used indicator of inflation. The basket of goods and services included in the CPI is intended to reflect the purchases of the typical urban consumer and is adjusted periodically to take into account shifts in consumer spending. CPI data is utilized by traders to trade the US Dollar, under the assumption that higher readings usually benefit the USD and lower ones drag down its value relative to other currencies.