Yesterday marked the strongest daily performance for the USD in over a fortnight, driven by investors strategically positioning themselves ahead of eagerly awaited inflation data scheduled for release today. The initial weeks of the year have primarily witnessed investors adjusting their expectations, moving away from anticipating policy easing by central banks throughout 2024. The overarching trajectory of this trend hinges on the trajectory of inflation and growth, which must continue to defy expectations in a positive manner.
January's figures for both consumer and producer price inflation exceeded forecasts, registering a monthly growth rate of 0.3%. Attention now shifts to the pinnacle of the US macroeconomic calendar – the unveiling of the personal consumption expenditure index (PCE). The Federal Reserve's favoured metric for inflation is projected to exhibit an annualized decline, considering both headline and core growth rates. Despite the anticipated deceleration in the core PCE from 2.6% to 2.4% due to base effects, marking the twelfth consecutive slowdown in underlying price growth, a monthly surge of 0.4% is expected. This would signify the most robust monthly price increase in nearly a year. Given the Federal Reserve's emphasis on data-driven decision-making, this rebound could fortify the case for a conservative approach, possibly translating into just three rate cuts this year, with the first cut postponed well into the second quarter. Such a scenario might serve as a catalyst for short-term strengthening of the USD.
Monitoring various PCE indicators will provide insights into the breadth of inflation. The substantial gap between high core services (4.0%) and low core goods (-0.1%) inflation is likely to endure.
