The US Dollar Index (DXY) is little changed, just under the mid-98.00s. Market participants are preparing for next week’s key inflation data in particular. The Consumer Price Index (CPI) will be released later in the North American session. These data points should provide a wealth of information regarding the Federal Reserve’s future monetary policy trajectory. Inflation targets usually target inflation to a low average of about 2% YoY. This week’s data will prove pivotal for the path of the new-look economic landscape and the currency markets.
Since the beginning of this year, inflationary pressures have accelerated, largely by the repeated supply-chain disruptions and bottlenecks that have yet to stop wreaking havoc on price. The CPI index tracks changes in the prices of a fixed market basket of consumer goods and services over time. Until recently, it had skyrocketed to multi-decade highs. Analysts are focused on how these dynamics will affect the Fed’s policy path from here.
Rising Inflation Amid Supply Chain Challenges
Particularly since the beginning of the COVID-19 pandemic, inflation has become a major issue and focus of discussion. The central bank’s mandate is to maintain price stability. That’s where the good news ends as it’s failing because the one pillar supporting inflation control has crumbled. Supply-chain issues have contributed to significant price increases across various sectors, further complicating the economic recovery.
This latest jump in prices has economists worried. There’s a growing consensus that the Fed needs to reconsider its prevailing view on interest rates. President Donald Trump has previously indicated that he prefers a Federal Reserve chairperson who supports lower interest rates, suggesting potential political influences on monetary policy. Against this backdrop, it’s worth considering just how the upcoming CPI data will be interpreted by market participants.
The YoY reading of the CPI is a measure that compares current prices to where they were the same month one year ago. Accordingly, this report is one of the most missable economic indicators when it comes to measuring the national long-term inflationary trend. This is what has led to blistering speculation—prices just continue going up. All eyes are turning to see how the Fed will react to this new data.
US Dollar Index Faces Headwinds
The DXY is testing its resolve for follow through after some slight directional reversal from yesterday. Today, during the Asian trading session on Thursday, it continues to oscillate within a tight range. That stagnation is a sign of market retreat in advance of the big inflation number everyone is expecting. The index recently broke down and was unable to recover momentum back above the 200-day Simple Moving Average (SMA). This development is a continuation of the overall negative trend for the Greenback.
As analysts on Wall Street have warned, the next CPI report needs to bring evidence of more than just a pause in inflation’s upward trends. If not, the DXY would find it hard to develop a palpable bottom. The index measures the value of the US dollar against a basket of six major currencies. If this price pressure remains, it can only have a more negative effect on the dollar’s performance.
Traders and investors alike are glued to these fast-moving developments. They understand that rising inflation might lead to abrupt turns in monetary policy. The Federal Reserve’s decisions regarding interest rates will likely be influenced by how the CPI data aligns with or diverges from its inflation targets.
The Importance of CPI Data
US Department of Labor Statistics gathers and publishes the Consumer Price Index data every month. Together, this data is one of the most important tools we have for measuring where inflation is (or isn’t) creeping into our economy. This new information is critical as a signal to help guide both consumer choices and investor confidence. Accordingly, the upcoming release is highly consequential for the business community.
Even if inflation is higher than hoped for, analysts largely agree that such an outcome would bring forward conversations on pulling away from easy monetary policy more quickly. If inflation looks persistently tame, this would provide room for the Fed to stay on hold with its more accommodative policy stance. This potential divergence in outcomes has traders on their toes as they wait for the report.