The U.S. dollar has lately been on an upswing of its own. Yet this calm may soon be lost as investors brace for key Consumer Price Index (CPI) data to be released on Thursday. Experts expect the year-over-year CPI rate to remain unchanged at about 3.0%. Inflationary pressures overall are beginning to ease, with some indicators pointing toward disinflation. Over the next few months, this will continue to place the implications for monetary policy in focus.
As market experts from MUFG point out, some of the import-sensitive sectors have experienced some very large month-over-month increases. They caution the effects of this tariff-induced inflation likely will appear in the data very soon. The double-NFP data release this past week showed a deteriorating labor market across the board. Here’s how this information should shape people’s expectations around the Federal Reserve’s next, and other, rate decisions.
Derek Halpenny, MUFG’s FX analyst, provided insights into the current market sentiment:
“We suspect further mixed employment data like we got yesterday will ultimately open up greater conviction over a rate cut in March but that may only come once we have the CPI data released on Thursday.”
Now the timing of a first rate cut in March is in doubt, with market expectations currently split 50-50. They certainly are not changing their outlook among global investors that are pricing in rate cuts all the way into 2026. Though the mixed employment figures paint a picture where parts of the economy are on the road back, in other ways things have just stopped moving.
The dollar’s tepid rebound seems to indicate the level of confusion hiding between the lines of other major economic releases. In fact, given the recent retail sales surprise—a positive 0.8% m/m increase, the biggest since June—this may be a good time. The labor market is still dealing with a great deal of stress. This is exhibit number one, the K-shaped recovery, with wealthier consumers doing just fine and lower-income consumers really struggling.
Mistrust in the Federal Reserve’s leadership has played a role in keeping the dollar steady. Notably, President Trump’s Fed Chair choice remains very much up in the air. Currently, Kevin Hassett is the odds on favorite. Both Kevin Warsh and Christopher Waller are back in contention, leading to speculation among investors about future monetary policy direction.
“The moderate recovery of the dollar also reflected the mixed nature of the other data releases – the Control Group retail sales surged 0.8% m/m, the biggest increase since June. We continue to see a disconnect between the labor market and consumer spending reflecting the K-shaped performance amongst consumers.”
All eyes on market participants are looking ahead and preparing for Thursday’s CPI number. All eyes will be trained on what the inflation data says about prevailing expectations for future Fed moves. The only major data remaining before potential policy change is next week’s CPI print. This leads to a potentially historic moment for the dollar and the economic outlook more generally.
“The lack of dollar selling could also reflect the fact that Kevin Hassett is no longer the definite pick for [Fed] Chair position and instead both Kevin Warsh and Christopher Waller are back in the running.”
As market participants prepare for Thursday’s CPI release, all eyes will be on how inflation data influences expectations for future Fed actions. The only top-tier data remaining before potential policy shifts is this upcoming CPI report, making it a pivotal moment for both the dollar and broader economic outlook.