Now only US inflation matters

Inflation in the US probably fell again in January. According to Federal Reserve Chairman Powell, a "disinflation process" has begun in the US - although so far it concerns goods. Data for January, which are to be released today, should confirm the fact that the dynamics of price growth is in reverse. However, the uncertainty of the forecast this time is slightly higher than usual.

Inflation in the service sector

First, January the data is based on a basket of goodsthat has been adapted to new consumption patterns. It is impossible to say whether this increased or decreased the rate of inflation last month. Secondly, many suppliers like to adjust their prices at the beginning of the year. However, we do not know whether this effect is greater than usual due to the current strong price pressure. High inflation continues to affect the service sector. The development of the situation in the area of ​​housing rents will be particularly important in the near future.

The US dollar, which gained last week, mainly due to surprisingly good performance, will certainly be sensitive to Tuesday's data NFP data and ISM. Lower than expected CPI readings should contribute to a return to USD depreciation, surprise with higher results will result in the strengthening of the "green".

Inflation data are key releases for the Fed and thus for the market at the moment. The Federal Reserve has indicated that it is ready to hurt the economy to bring down inflation - that is, it will raise rates as high as necessary regardless of the effects on GDP.

As for the market, it still assumes that today we will see a picture of where price growth continues to weaken (down to 6,2% y/y) and thus we will be approaching the end of the tightening cycle. Admittedly, the market slightly corrected its valuation after the latest data and statements of US officials. Still, at the end of the year, market participants "bet" the first cuts - despite the fact that almost every commentary of individual Fed members negates such a scenario.

Back to the goal

Fed governor Michelle Bowman shared the latest opinions with the market, according to which the US central bank will continue to raise interest rates to a restrictive level and then will have to keep them for "some time" to bring inflation back to the Fed's target, which is 2 percent She added that "although we have seen slightly lower inflation readings in recent months, the overall momentum remains high… Persistently tense labor market conditions are putting pressure on CPI growth, even as some components of inflation are easing due to improving supply-side factors."

The dollar, after strengthening at the beginning of February, is trading quite flat in the following days. This translates into lower volatility of the main currency pair, which after reaching the level of 1,0665 was unable to break this technical barrier last week or yesterday. Current correction EUR / USD exchange rate is similar in size to that at the turn of October and November 2022. In addition, local lows formed within the first Fibo 23,6 percent internal retracement.

Source: Łukasz Zembik, OANDA TMS Brokers