US CPI Preview: USD/JPY and Stagflation Risks
The US CPI report for February is set to release on Wednesday, March 12th, at 8:30 AM ET (13:30 GMT). Here's what to expect and how it might affect the USD/JPY currency pair.
Key Takeaways
- US CPI Expectations: Headline inflation is projected at 2.9% y/y, and core inflation (excluding food and energy) at 3.2% y/y.
- Potential Fed Rate Cut: A Q1 "growth scare" has increased the possibility (around 40% according to CME FedWatch) of the Federal Reserve cutting interest rates in May.
- USD/JPY Support Zone: The USD/JPY is testing a key support level. An as-expected or higher inflation reading could lead to a bounce.
Report Details
Economists anticipate headline CPI to reach 2.9% year-over-year, while core CPI is expected to hit 3.2% year-over-year.
Economic Context
While the Federal Reserve remains focused on controlling inflation, recent labor market weakness, including a disappointing nonfarm payrolls (NFP) report, suggests a potential "growth scare." This could influence the Fed's decisions regarding interest rates.
Traders largely anticipate the Fed to maintain current interest rates at its upcoming meeting. This may limit volatility around this week's inflation data, as the Fed will likely have several more inflation and jobs reports before making significant policy shifts.
CPI vs. Core PCE
The Federal Reserve primarily monitors Core PCE when formulating monetary policy. However, the CPI report is equally crucial for traders, as it is released earlier. The year-over-year measure of US CPI has risen consecutively for the last four months.
Rising PMI reports indicate firms are paying more for goods and services amidst tariff uncertainties and potential trade wars. This may further drive CPI upward. This combination of sluggish growth and high inflation could create a challenging "stagflation" environment for the Fed.
Base Effect
The "base effect" also impacts CPI figures, referring to how the reference period influences the final result. Last January's 0.4% m/m reading will drop out of the annual calculation. Consequently, the headline year-over-year CPI may decrease if this week's month-over-month reading is less than 0.3%.
USD/JPY Technical Analysis
The USD/JPY pair is known for its sensitivity to US economic data. Since early January, the pair has trended downward, peaking near 159.00.
Currently, it is testing support near 147.00, a confluence of the bottom of its descending channel and the 61.8% Fibonacci retracement. A CPI report that meets or exceeds expectations could trigger a bounce. A bullish divergence in the 14-day RSI supports this potential bounce from a technical standpoint.
Source: Original Post