FX alert: CPI’s faint pulse in a data blackout

Markets are heading into tonight’s CPI print like pilots flying through fog — the instruments are all we’ve got, and half of them aren’t even working. With Washington’s data blackout now stretching into its fourth week, this CPI release feels less like a routine checkpoint and more like the last blinking beacon before the radar goes dark again. The Bureau of Labor Statistics has been recalled from administrative limbo at the President’s insistence, not because the world’s waiting for Social Security adjustments, but because the Fed meets in days and Trump wants his rate cut — and fast. That alone tells you everything you need to know about what kind of number might “coincidentally” emerge. Or put more bluntly, it doesn’t take a crystal ball to know where this one’s headed — let’s just say nobody’s betting on an upside surprise.

Consensus expects a +0.3% monthly rise in both headline and core, flat from the prior pace, which on paper keeps annual inflation near 3.1%. But traders aren’t trading the print — they’re trading the politics, the optics, and the oxygen of policy expectations. Whether this lands at 3.0% or 3.2%, the story is the same: inflation isn’t the threat; job growth is. The real conversation sits with Powell, who’s now being gently coached from the sidelines that the inflation “target” can stretch to 3% or higher — many in the game are coming around to that idea also.

The Fed minutes laid bare the split in the ranks — one camp sees a weakening job market that demands more easing, while another worries inflation might reheat just as the Fed’s cutting. But there’s an unmistakable undertone: the doves have the momentum, and the hawks have run out of altitude. With money markets already pricing two full cuts by year-end, tonight’s number is unlikely to change that trajectory. A soft print will simply confirm what everyone suspects — the easing cycle isn’t speculative anymore, it’s policy.

The anatomy of the report itself will be full of the usual noise: tariffs pinching here, airfare discounts there, car prices doing their dance of dead-cat stability. The so-called “tariff inflation” narrative has been losing credibility for months. Japan’s trade minister basically confirmed what traders already knew — car exporters are eating the costs. Tariffs may shift margins, but they haven’t been moving CPI. What’s really cooling inflation is the slow bleed from housing and labor — the two engines that had kept price pressure alive. They’re losing thrust, and the Fed knows it.

For markets, the reaction function is more about rhythm than data. A hot print may cause a brief flutter — a spasm of dollar strength, a mechanical uptick in yields, maybe a few algorithms hitting the S&P bid — but the undertow still runs dovish. Every uptick in inflation is treated as temporary; every downtick as confirmation. The bias is asymmetric: soft numbers will feed the cut narrative, strong ones will barely dent it. That’s what happens when traders start pricing the Fed’s posture, not its promises.

In FX, the dollar has been drifting — more wind than will — with most of its recent strength borrowed from weaker currencies rather than its own story. Yen weakness after Japan’s political shift, and a French-induced slump in the euro, have given the greenback the illusion of vitality. But underneath, the correlations are breaking down. The dollar’s old role as a hedge against risk has faded. The VIX tells the real story: equity fear and dollar demand aren’t dancing in step anymore. When risk sells off, the dollar no longer automatically rallies — a sure sign of thin confidence.

The smart money is running into CPI short vol but long skew — betting the report will pass with a shrug, not a shock. Equity volatility remains rich, but the real risk premium has migrated into credit and growth expectations. The game now is about calibration, not conviction. Traders are selling premium into the fog, trusting that nothing in tonight’s number will pierce it.

And perhaps that’s the ultimate irony of this CPI: the market no longer believes in it as a compass. The shutdown has muted the data, the Fed has pre-written its script, and the economy itself is whispering instead of shouting. So we’ll watch the print, nod at the decimal points, and move on — because what moves this market now isn’t inflation, it’s the absence of clarity. The CPI is just the pulse of a patient we already know is sedated.

My view

I’m trading well out of the mainstream read right now. While most of the street is still fixated on the USDJPY carry trade, I’ve started shifting my attention to the stronger yen and the repatriation trade. That story’s been sitting in plain sight, but it feels like nobody’s reading it yet. Japanese real returns are improving, and the capital flow tide that’s been running outward for two decades might be quietly turning back in.