January’s US CPI may not benefit the DXY
Rising inflation impressions from the US could hurt rather than support the US Dollar Index (DXY).
A big beat on the January CPI is needed
Rising inflation is printing damage in the US rather than supporting the US Dollar Index (DXY). The median consensus already calls for a print of 7.3% y/y with a narrow forecast range of 7.0% to 7.6% y/y, against a print of 7% for December, according to a recent poll by Bloomberg. Granted, that’s high by any measure, but month-over-month headline inflation has been slowing since November 2021.
Is the inflation narrative dead?
Even a consensus impression could put downward pressure on the DXY. Rising inflation was the dominant theme that lifted Fed rate hike expectations, and in turn helped lift the DXY. Interest rate markets are implying four to five hikes in 2022, followed potentially by two or three more in 2023. A consensus CPI index or failure could cause some of those interest rate expectations to disappear. interest.
Attention could turn to growth
The death of the inflation story could quickly shift the market discourse away from inflation and firmly onto growth. The International Monetary Fund’s World Economic Outlook indicates a slowdown in economic activity in the United States, from 5.7% last year to 4.0% in 2022. In addition, more current indicators like the ISM manufacturing and non-manufacturing indices for January show a slower pace of activity in January.
Labor market conditions, on the other hand, have held up, as indicated by January’s strong labor market report. That said, the US labor cost index fell to 1%y/y in the fourth quarter of last year from 1.3%y/y in the third quarter, casting doubt on a wage-price spiral. In addition, labor force participation, especially in some sectors, remains depressed compared to pre-pandemic levels.
Techniques don’t look optimistic
Likewise, the technical picture of the DXY does not really convey confidence vis-à-vis the US dollar. After the DXY’s strong rise in November 2021, the index failed a sustained break above the 96.940 95.495 range which has more or less held up since late December. More recently, the index has tested and approached the bottom of this range. The RSI and the 200-day exponential moving average also tell a less than bullish story.