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February Inflation Preview: US CPI Seen Steady at 3.1%, Core Down to 3.7%

February Inflation Preview: US CPI Seen Steady at 3.1%, Core Down to 3.7%

The upcoming release of the US CPI (Consumer Price Index) data for February is a highly anticipated event, poised to significantly impact global markets, particularly the Euro (EUR) and the US Dollar (USD). This article delves deeper into the details surrounding the US CPI report, exploring its potential effects on inflation, Federal Reserve policy decisions, and the EUR/USD currency pair.

US CPI Forecast: Inflation Likely to Hold Steady

Analysts predict that US inflation, as measured by the annual US CPI, will remain at 3.1% in February, mirroring January’s figures. The Core CPI, excluding volatile food and energy prices, is also expected to show a slight decrease, settling at 3.7% compared to 3.9% in January. This suggests a potential slowdown in core inflation, albeit at a still-elevated level.

Focus on Core CPI and its Impact on Fed Policy

The Federal Reserve (Fed) closely monitors the Core CPI as a crucial indicator of underlying inflationary pressures. Fed Chair Jerome Powell, in his recent testimony, acknowledged the uncertainty surrounding the economic outlook and the challenges in achieving the target 2% inflation rate. He hinted at the possibility of a policy pivot, involving a reduction in interest rates, later this year. However, the Fed desires greater confidence in inflation’s sustained downward trajectory before taking action.

Market Response Hinges on CPI Figures

The January CPI report, although indicating a slower disinflationary trend, provided only a temporary boost to the USD. Markets had already factored in a delayed Fed pivot due to robust January labor market data. The USD Index (DXY) experienced a short-lived rise before resuming a downtrend.

Currently, markets anticipate a nearly 75% chance of a Fed rate cut in June. While February’s CPI figures might not drastically alter this outlook, a higher-than-expected rise in the Core CPI could trigger a USD rebound against other currencies. This could entice investors to unwind their USD short positions.

Conversely, a Core CPI print in line with or below expectations would likely solidify June as the target month for the Fed pivot. However, the market’s current positioning suggests limited downside potential for the USD. In this scenario, an initial weakening of the USD is possible, but a sustained sell-off would likely require additional factors, such as a surge in US equities or a significant drop in the US Treasury bond yield.

Technical Outlook for EUR/USD: Awaiting US CPI Guidance

The EUR/USD pair’s technical outlook hinges on the US CPI data. a leading analyst observes a potential pause in the EUR/USD’s upward momentum based on the Relative Strength Index (RSI) indicator. Key resistance levels for the EUR/USD include 1.0960 (Fibonacci retracement) and the psychological barrier of 1.1000. A sustained move above these levels could pave the way for a further rise towards 1.1100.

On the flip side, strong support appears to be forming around 1.0830-1.0840, where the 100-day and 200-day Simple Moving Averages (SMAs) converge. A daily close below this zone could trigger a deeper correction for the EUR/USD, potentially pushing it towards 1.0800.

Conclusion: US CPI in the Spotlight

The upcoming US CPI report for February is a pivotal event for global markets. The data will influence investor sentiment regarding inflation, the Fed’s policy trajectory, and currency valuations, particularly between the EUR and USD. A close examination of both the headline and Core CPI figures, along with their implications for future Fed actions, is crucial for navigating the potential market volatility in the wake of this critical economic data release.


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