US Dollar May Fall if Soft Core Inflation Data Cools Fed Rate Hike Bets

The US Dollar may turn lower if January’s core inflation data undershoots forecasts, undermining Federal Reserve interest rate hike speculation.

Talking Points:

• Euro, Pound Unlikely to Find Volatility in UK GDP and German Jobs Data

• US Dollar May Decline if Soft Core CPI Weighs on Fed Rate Hike Outlook

• Australian Dollar Down as Weak Capex Report Boosts RBA Rate Cut Bets

The economic calendar is relatively quiet in European trading hours. A marginal improvement on German Unemployment figures is unlikely to prove formative for the Euro considering its limited implications for ECB monetary policy as the central bank prepares to launch QE next month.

The same is likely for revised of fourth-quarter UK GDP data. The British Pound did not yield a strong response to this week’s testimony from Bank of England Governor Mark Carney, suggesting near-term policy bets are well priced into the market. That means anything shy of a game-changing revision is unlikely to trigger an outsized response from Sterling.

Later in the day, the spotlight turns to January’s US CPI report. Traders will focus on the Core reading that excludes the volatile food and energy prices dismissed by Fed policymakers. This is seen putting the year-on-year inflation rate at 1.6 percent, unchanged from December. US data flow has increasingly lagged relative to forecasts in recent months however, warning of a possible downside surprise that cools FOMC rate hike bets and weighs on the US Dollar.

The Australian Dollar underperformed in overnight trade, falling as much as 0.6 percent on average against its leading counterparts. The move followed a disappointing Private Capital Expenditure report. Capex fell 2.2 percent in the fourth quarter, undershooting forecasts calling for a 1.6 percent decline.

The Aussie’s down move tracked a decline in Australia’s benchmark 10-year bond yield, suggesting soft news-flow fueled interest rate cut speculation. As it stands, investors are pricing in a 55 percent probability of a 25 basis point reduction in the baseline lending rate at next week’s RBA policy meeting.