Should you buy or sell the US dollar ahead of today’s US CPI report

By:
on Oct 13, 2022
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  • Financial market participants expect the US CPI report to show signs of inflation cooling down
  • Stocks cannot rally unless there is evidence that inflation has peaked
  • Both the YoY and MoM data matters for the Fed in deciding the next move

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The main event of the trading week is the US CPI report scheduled for release today during the North American session. Inflation has been a headache for central banks in the aftermath of the COVID-19 pandemic and the European energy crisis.

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As such, a race to tighten financial conditions has started, with major central banks struggling to raise the interest rates as quickly as possible without hurting the economy. At this point, everyone is looking for inflation to come down, especially in the United States, where the Federal Reserve has no plans of ending the tightening cycle.

It makes today’s inflation report a critical piece of economic data. So naturally, markets understood it, as seen in the tight ranges in the days preceding the report’s release.

In the meantime, the US dollar remains strong against all of its peers. Many were quick to point out that the euro, the common currency, has depreciated against the dollar, but other currencies have fallen even more strongly, not because of domestic measures but because of the dollar’s strength.

What to expect from today’s US CPI report?

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The markets are desperate for a sign that inflation is cooling off. In the United States, inflation is running at a multi-decade high, currently at 8.3% YoY.

The expectation is that it will cool down to 8.1% YoY. Also, the MoM Core CPI data matters for the Federal Reserve, expected at 0.4% after rising by 0.6% last month.

Markets will undoubtedly like any sign that inflation has peaked. It is what keeps the stock market under pressure and, ultimately, the strong dollar, so a sign that inflation has peaked will trigger a sharp move higher for the equity markets and a wave of dollar selling.

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