The US Bureau of Labor Statistics (BLS) will publish January’s Consumer Price Index (CPI) data on Friday, delayed by the brief and partial United States (US) government shutdown. The report is expected to show that inflationary pressures eased modestly but also remained above the Federal Reserve’s (Fed) 2% target.
The monthly CPI is forecast to remain steady at 0.3%, matching the December figure, while the annualized reading is expected at 2.5%, slightly below the 2.7% posted in the previous month. Core readings are expected at 0.3% MoM and 2.5% YoY, little changed from the previous 0.2% and 2.6%, respectively.
Inflation data is critical for Fed officials, although the CPI is not their preferred gauge. Policymakers base their monetary policy decisions on the Personal Consumption Expenditures (PCE) Price Index. Nevertheless, CPI figures are a strong indication of where price pressures are heading and therefore tend to trigger relevant market movements.
What to expect in the next CPI data report?
The anticipated figures are not expected to produce any shock. The CPI has been below 3% since mid-2024, but stubbornly above the desired 2%. The lowest reading in the last two years was 2.3%, posted in April 2025. One might believe that, as long as inflation remains within those parameters, the impact on financial markets will be moderate.
But it is not as simple as that. Indeed, a 2.3% or a 3% print will shake the foundations. The nearer the figure comes to the 2% goal, the higher the chances of a soon-to-come interest rate cut. Conversely, a reading near 3% wouldl dilute the odds for lower rates. That would be easy to interpret if it weren’t for US President Donald Trump’s desire for lower rates and his actions over the last year, which have sought to force policymakers’ hands to the point of calling into question the Fed’s independence.
President Trump has nominated Kevin Warsh as the next Fed Chair, as Jerome Powell’s term ends in May. Powell has refused to reduce interest rates simply because President Trump wants them to. Trump hopes that putting a hawk at the head of the Fed will support his case. Still, if inflation is closer to 3% than 2%, Warsh would have a hard time pleasing Trump.
Meanwhile, a strong Nonfarm Payrolls (NFP) January report adds another factor to the Fed’s picture. The surprise improvement in the employment sector is good news for the Fed, which has lately worried that the labor market had cooled a bit too much. Yet it’s also worth reminding that an overly strong labor market also works against interest rate cuts. A strong reading that followed several weak ones is not a concern. But a couple more strong NFP reports are likely to take their toll on rate moves.
How could the US Consumer Price Index report affect EUR/USD?
Back to the CPI release, market participants will rush to price in the Fed’s potential response to the data as soon as it is released. A reading in line with the market expectations will have no material impact on the USD trend. A yearly reading of 2.4% or below would be considered extremely positive and boost the odds for an interest rate cut, while spurring demand for the USD. On the contrary, a reading of 2.7% or higher will diminish the odds for lower rates and trigger broad USD weakness.
Valeria Bednarik, FXStreet Chief Analyst, notes: “Ahead of the US CPI announcement, the EUR/USD pair consolidates just below the 1.1900 mark. The daily chart shows the positive momentum receded, but also that buyers hold the grip, as the pair continues developing well above all its moving averages, with the 20-day Simple Moving Average (SMA) providing dynamic support in the 1.1820 region. The same chart shows technical indicators remain within positive levels, but are losing their upward slopes. Finally, the pair has retreated for three consecutive days on approaches to the 1.1930 level, converting the area into a relevant resistance zone.”
Bednarik adds: “A clear advance beyond 1.1930 should result in a test of the 1.1980 level, en route to the recent multi-year high at 1.2082. On the other hand, a clear breach of the 1.1800-20 price zone should open the door to a steeper decline, initially targeting 1.1760 and heading towards the 1.1700 threshold.”
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money.
When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions.
The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system.
It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
Economic Indicator
Consumer Price Index ex Food & Energy (YoY)
Inflationary or deflationary tendencies are measured by periodically summing the prices of a basket of representative goods and services and presenting the data as the Consumer Price Index (CPI). CPI data is compiled on a monthly basis and released by the US Department of Labor Statistics. The YoY reading compares the prices of goods in the reference month to the same month a year earlier. The CPI Ex Food & Energy excludes the so-called more volatile food and energy components to give a more accurate measurement of price pressures. Generally speaking, a high reading is bullish for the US Dollar (USD), while a low reading is seen as bearish.
Read more.
Read the full article here
