How will today's inflation data from the US affect the USD valuation?

Tomorrow Fed will decide on rates. However, before this happens, investors will learn what inflation was like in the US in November. The basic indicator is expected to drop to 3,1% on an annual basis. On a monthly basis it is expected to be 0%. The base rate is forecast to remain at 4%. y/y month-on-month is expected to grow to 0,3%. from 0,2 percent previously.

Downward trend in inflation

The dollar will react if we get a surprise on both sides. Higher than expected readings will cause the market to assume that Fed will continue to maintain a hawkish stance, although further rate increases are unrealistic according to the market. In such a scenario, the USD will likely strengthen and US bond yields will be pushed higher again.

General and core indicator of inflation measures in the USA show clear downward trends. The market will largely look at month-to-month relationships. It is important to remember that the Fed's inflation target of 2%. on an annual basis, it corresponds to a value of approximately 0,17%. on a monthly basis. With the latest data, the impression has probably been reinforced that the inflationary momentum that has brought us such sky-high inflation rates in 2021/22 has finally been broken. However, the last section of disinflation to achieve the goal may be more difficult and bumpy.

Revision of market expectations

Unless today's inflation data bring a huge surprise, further interest rate increases are possible remains a completely unrealistic scenario from a market perspective. The valuation suggests that the Federal Reserve should start easing monetary policy sometime around May or June. At one point, the March move was quite realistic, but last NFP data they slightly remodeled the overly optimistic market assumptions.

If U.S. inflation data surprises at a low level today, it will be even more difficult for Powell to push Fed expectations higher tomorrow. The common view is that its purpose is to too much loosening of monetary policy has not brought any effect now, and the disinflation trend did not end prematurely. Tomorrow, every hawkish word from Powell will be interpreted as a willingness to further revise market expectations regarding the imminent start of interest rate cuts in the US.

Source: Łukasz Zembik, OANDA TMS Brokers