• The US is set to report another increase in inflation in January. 
  • Core prices return to the spotlight amid the Fed's focus on inflation.
  • After retreating from the post-jobs report highs, the dollar is ready for the next boost.

Annual inflation with a 7% handle? That has already happened, and now the focus returns to underlying prices – which are closely watched by the Federal Reserve. The dollar is ready to rally. 

The world's most powerful central bank is on course to raise interest rates in March in order to cool down the steaming hot economy, but there is significant uncertainty about how fast it will go. Friday's Nonfarm Payrolls figures for January showed an increase of 467,000 positions, much higher than expected and on top of upside revisions. Employment is one of the Fed's mandates.

The second mandate is price stability – and the NFP revealed a whopping increase in wages, 5.7% YoY, which implies higher inflation down the line. While energy and food costs are volatile and prone to external factors, high pay pushes all prices higher. That is what the Fed is looking at more closely. 

Therefore, the upcoming Consumer Price Index (CPI) release for January will likely focus on underlying price pressures, rather than the headline figures that the public and politicians are more interested in. It would help determine if the Fed raises rates by 0.25% or by 0.50% as some suspect. 

As mentioned earlier, headline inflation has already hit 7% in December, and an increase to 7.3% or 7.6% would not make such a difference. However, Core CPI is projected to rise from 5.5% to 5.9%. If it surpasses the 6% level, investors would return to speculate on a double-dose rate hike.

Underlying inflation is already significantly above historical averages:

Source: FXStreet

Speculation ebb and flow

Back on January 26, Fed Chair Jerome Powell refused to commit to a standard 0.25% increase to borrowing costs, sending the dollar higher by opening the door to faster moves, such as 0.50%.

On February 1, no fewer than six officials at the central bank already played down such expectations, leaning toward a standard 0.25% increase. The list included several known hawks such as Atlanta Fed President Raphael Bostic and the greenback gave some ground. 

Then came the Nonfarm Payrolls report on February 4, smashing all estimates and energizing the dollar. However, the European Central Bank and the Bank of England also began toward moving tighter policy, diminishing some of the greenback's advantages. 

And now, the focus returns to the world's largest economy – which also leads on inflation. The dollar has room to run if the Core CPI hits 6% or higher, and even an "as expected" statistic at 5.9% would provide support to the currency pair.

It is essential to note that the Fed's target is 2% average inflation over time, so a significant miss with 5.5%, like in December, or even 5% would still be high. Nevertheless, a repeat of last month's data – which seems highly unlikely – would already send the greenback down.

Final Thoughts

The most probable scenario is for the dollar to drive higher in response to a high Core CPI read. This figure is critical for the Fed and beat estimates in the past three publications. 


Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.

If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.

FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.

The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.

Feed news Join Telegram

Recommended Content

Recommended Content

Editors’ Picks

EUR/USD turns south towards 1.0150 ahead of EU GDP, Fed minutes

EUR/USD turns south towards 1.0150 ahead of EU GDP, Fed minutes

EUR/USD has come under renewed selling pressure below 1.0200 amid broad risk-aversion. The US dollar rebounds ahead of Fed minutes while the euro awaits Eurozone GDP. The shared currency remains weighed down by recession fears and gas crises.


GBP/USD drops below 1.2100 amid risk-aversion

GBP/USD drops below 1.2100 amid risk-aversion

GBP/USD is falling below 1.2100 in the European session on Wednesday as investors assess the implications of surging UK inflation on the BOE's next policy move. The US dollar finds demand amid souring risk sentiment ahead of US data and Fed minutes. 


Gold’s battle with 50 DMA extends ahead of Fed minutes

Gold’s battle with 50 DMA extends ahead of Fed minutes

Gold price rebounds from weekly lows as the USD resumes correction. US Treasury yields are struggling to find demand ahead of the Fed minutes. XAU/USD needs acceptance above 50 DMA to sustain the recovery.  

Gold News

Solana price hints at a 50% upswing under these specific conditions

Solana price hints at a 50% upswing under these specific conditions

Solana price shows an interesting setup as it tries to overcome a stiff resistance level. The fifth attempt to overcome hurdles will likely be successful due to multiple bullish confluences. Solana price has been on a clear uptrend since producing the June 14 swing low at $25.76.

Read more

FXStreet Premium users exceed expectations

FXStreet Premium users exceed expectations

Tap into our 20 years Forex trading experience and get ahead of the markets. Maximize our actionable content, be part of our community, and chat with our experts. Join FXStreet Premium today!