US CPI Preview: How Will the US Dollar React?
US CPI, US Dollar Analysis and News
- Increasingly Hawkish Fed Doing Little to Support the USD
- US CPI Projected to Hit 7% for the First Time Since 1982
The USD continues to struggle, failing to find its feet, despite the Fed hawks coming out in force yesterday, alongside Powell reiterating much of what we have seen priced in over the past week. Among the more notable comments had come from Bostic, who is the first Fed speaker to put a number on the size of the balance sheet runoff. The Atlanta President stated that the balance sheet should decline at least $100bln/month. To put that in context, this would be triple the size of the monthly runoff seen during the 2017-2019 quantitative tightening period.
- The 2017-2019 QT period saw the balance sheet fall $31.3bln/month on average
- 2018 average at $30.3bln/month
- 2019 average (stopping in Sep) at $38.6bln/month
Moving on, the main event of today will be the latest US CPI report, where expectations are for the headline to rise 0.2ppts to 7.0%, while the core figure is seen up 0.5ppts to 5.4%. That being said, with the USD failing to rise in light of markets pricing in a more aggressive tightening path, going from 3 to 3.5 hikes this year, it does seem that traders are biased to sell the USD with much of the good news already reflected in the price.
- CPI Expected 7.0% (Previous 6.8%), Range 6.6%-7.2%
- Core CPI Expected 5.4% (Previous 4.9%), Range 4.2%-5.6%
The table below shows the multi-asset reaction to the US CPI in recent months, which shows that anything short of a sizeable upside surprise, results in USD depreciation. The fact is, the Fed has acknowledged that inflation is spiralling somewhat, therefore, with markets over 80% priced in for a March hike and near 50% priced in for a fourth hike, significant upside for the USD appears to be limited.
Figure 1. Multi-Asset Response to US CPI
Source: DailyFX, Refinitiv, Bloomberg
FX Option Implied Volatility Subdued Ahead of US CPI
Ahead of the CPI report, FX options are implying a rather tepid reaction to the risk event. The
The Euro breakeven straddle is at 42pips (meaning, EUR/USD is expected to move in either direction by 42pips). Of course, while FX option implied volatility is tame, a reminder that the size of the reaction will be dependent on the deviation from consensus.
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