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The Bureau of Labor Statistics (BLS) in the US is scheduled to report the recorded monthly change in the Consumer Price Index for all Consumers on Thursday, which is likely to be the most significant economic event this week.
The Consumer Price Inflation rate on a year-on-year basis rose to 2.3 per cent in December, which is already above the 2 per cent symmetric target level that was set by the FOMC.
The current market forecasts project an additional surge by 0.2 per cent to be recorded for January, which would result in the consumer price inflation rising to 2.5 per cent.
US Inflation Rate. Image source: TradingEconomics.com
Inflation is currently surging due to two major factors. Firstly, the robust job gains in the US labour market are accommodating bolstered consumer confidence among US workers, which results in heightened customer spending.
Secondly, FED’s accommodative monetary policy is making liquidity in the market easily accessible, which, in turn, stimulates increased business investment and heightened spending within the economy.
Nevertheless, soaring inflation way above the 2 per cent target level creates problems of its own. That is why if the CPI does indeed rise to 2.5 per cent in January, the FED would be given enough evidence to at least consider raising the interest rate during the next meeting of the FOMC.
Higher interest rate would prevent the economy from ‘overheating’ by diminishing the incentives of some investors for borrowing ‘cheap’ capital.
Thus, if the reported data on Thursday meets the consensus forecasts, the dollar is more than likely to be strengthened as an immediate consequence of the report’s release.
In the longer-term, however, the market pressures and sentiment might get completely reversed if traders and investors begin to weigh in on the potential lifting of the federal funds rate and the implementation of a more hawkish stance by the FED.
It is because of those reasons that the dollar is likely to strengthen against other major currencies following the release of the inflation data.
In the case of the EURUSD, the greenback needs a little bit of more bullish commitment before the pair can tumble to the major support at 1.09250 and thereby test its strength.
EURUSD 1D Price Chart. Image source: Trendsharks ©, created with TradingView.com
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