Will Inflation Data Cause a Fed Pause?
In general, inflation has slowed down in recent months. On Thursday, markets will get a look at the printout of the December CPI. Print headline is expected to continue falling to 6.5% on the year from a November reading of 7.1% on the year.
Last month’s reading was the fifth consecutive monthly decline after peaking at 9.1% year over year in June 2022. The print was also the lowest reading since December 2021. Furthermore, the underlying inflation rate, which excludes food and energy, is expected to slow to 5.7% year over year from a previous reading of 6% year over year. If the Core CPI turns out as expected, it will also be the lowest since December 2021.
Markets are also seeing a slowdown in wage growth. Average hourly wages for December slowed to 4.6% year over year versus expectations of 5% year over year and revised down November print 4.8% year over year from 5.1% year over year . The Fed is concerned about wage growth and this data was the first sign that wages may be growing at a slower pace.
The risk to markets is that CPI data is weaker than expected. The Fed has already indicated in its summary of economic projections that it expects the federal funds rate to reach 5.1%. The current federal funds rate is 4.50%. If inflation data is weaker than expected, markets could start pricing in a lower chance of a rate hike at the February 1 meeting. According to the CME FedWatch Tool, markets are pricing in a 78% chance of a 25 basis point rate hike and a 22% chance of a 50 basis point rate hike.
As it has been, a weaker-than-expected inflation reading should prove positive for equities and negative for the US dollar. USD/JPY had been trading higher in forex until October 21, when the Ministry of Finance intervened for the second time in 2022 in the foreign exchange markets. The pair then began to descend in an orderly channel. However, when weaker-than-expected US CPI printouts were released on Nov. 10 and Dec. 13, the USD/JPY forex pair moved aggressively lower. The November 10 move was down 545 pips, more than both intervention days!
USD/JPY daily chart
On the daily chart, the USD/JPY pair is currently trading on the upper trend line of the channel. The first support is at the 2023 low from January 3 at 129.50. The next support is at the 61.8% Fibonacci retracement level from the 2022 lows to the 2022 highs at 128.17. Below, the price could drop to a May 24 low at 126.36. If the CPI is in line with or above expectations, the USD/JPY pair could rise in forex. The first resistance is at the January 10 high at 134.77. Above, the price can reach resistance at the 200-day moving average near 136.53 and then the December 15th highs at 138.18.
The US CPI reading for December is scheduled for Thursday, January 12. Inflation has been down since the summer, but will it continue? If the CPI continues to be weaker than expected, watch the USD/JPY pair for further forex downside.
By Joshua Warner, FOREX.com » Official site
Disclaimer: The information and opinions contained in this report are provided for general information only and do not constitute an offer or solicitation to buy or sell any foreign exchange or CFD contract. Although the information contained herein was obtained from sources believed to be reliable, the author makes no guarantees as to its accuracy or completeness, and assumes no responsibility for any direct, indirect, or consequential damages that may arise from anyone relying on such information.