How will today's inflation data affect the dollar?

Wall Street turned red yesterday, but only in a moderate way. The risk reduction occurred a day before the publication of the report on American spending, which will include the Fed's preferred measure of inflation.

The EUR/USD rate fell to 1,08 and then rebounded to around 1,0840 in the second part of the day. Yields on US bonds decreased. Individual representatives Federal Reserve Yesterday they voted in favor of 100 percent cuts this year. Bitcoin set a new one yesterday a multi-month peak of 64. USD and approached the record valuation of 2021.

There's still a long way to go to achieve the goal

Yesterday's statements by Fed representatives were quite cautious, although some had a slightly more dovish tone. Susan Collins said that it would be appropriate to start easing monetary policy this year. She stressed that achieving the inflation target will be "bumpy" and she personally would like to see more evidence of a sustainable trajectory for price stability.

John Williams stated quite clearly and directly that The Fed will lower the cost of money this year. The arguments he indicated were: a strong economy and the expected further decline in inflation. At the same time, he made the pace of reduction dependent on economic data. Finally, he added that "the Fed still has a long way to go to achieve its goal" - this is probably a sentence that each decision-maker emphasizes every time, so that the market does not perceive the previous words as very dovish. Bostic from Atlanta assessed the patient approach to monetary policy as correct. He unequivocally rejected declaring victory in the fight against inflation.

Yesterday, the yield on 2-year US treasury bonds fell by almost 6 basis points to 4,64%, and the yield on 10-year bonds by 4 basis points to 4,26%. German 10-year government notes were unchanged at 2,46%, while British equivalents fell 1 basis point to 4,19%.

There is a risk of high wage pressure

As for the US data, the second GDP estimate for the fourth quarter was slightly revised down to 3,2%. q/q on an annual basis from 3,3%. in the preliminary estimate. Private consumption was revised upwards to 3%. from 2,8 percent initially.

The focus today will be on the PCE deflator for January, given the recent higher-than-expected reports CPI inflation and PPI for January. The market consensus for the main PCE deflator is 2,4%. year on year (2,6% previously), and the expectation for the core indicator is 2,8%. (2,9% previous). There is a slightly higher risk that today's numbers will go higher, and if that happens then the dollar may strengthen which will mean that the eurodollar exchange rate may fall below 1,08. First of all, the month-on-month dynamics of the PCE core deflator have not yet permanently "returned" to pre-pandemic levels and this will certainly be noticed by American decision-makers. Additionally, high wage pressure is still a risk factor, which indicates the central bank's cautious approach, which will probably be reflected in the continuation of the "higher for longer" strategy.

Source: Łukasz Zembik, OANDA TMS Brokers