US CPI data set to show inflation edged lower in February as markets gauge Fed’s rate cut path

The US Consumer Price Index is forecast to rise 2.9% YoY in February.
The core CPI inflation is seen a tad lower at 3.2% last month.
The inflation data could impact the US Dollar’s value and the Fed’s cautious policy stance.

The United States (US) Bureau of Labor Statistics (BLS) is set to publish the high-impact Consumer Price Index (CPI) inflation report for February on Wednesday at 12:30 GMT.

The CPI figures could notably impact the US Dollar (USD) and the Federal Reserve’s (Fed) cautious monetary policy stance.

What to expect in the next CPI data report?

As measured by CPI, inflation in the US is set to rise at an annual pace of 2.9% in February, down slightly from 3.0% reported in January. Core CPI inflation, which excludes the volatile food and energy categories, is expected to ease to 3.2% in the same period from a year earlier, compared to a 3.3% growth in January.

On a monthly basis, a 0.3% increase is projected for the headline CPI and the core CPI inflation figures.

Previewing the report, analysts at TD Securities noted: “We expect core CPI inflation to cool down in February following the January jump to 0.45%, as price resets came in firmer than expected in the services segment. We look for slowing in both the goods and services segments, with owners' equivalent rent (OER) inflation dropping to a 3-month low.”

“On a year-over-year (YoY) basis, headline and core CPI inflation are likely to drop by a tenth each to 2.9% and 3.2%, respectively,” TDS analysts said.

How could the US Consumer Price Index report affect EUR/USD?

Against mounting US economic slowdown concerns and President Donald Trump-led global tariff war, markets are now pricing in 85 basis points (bps) of easing from the Fed this year, compared to 75 bps on Monday, per the LSEG Fed interest rate probabilities.

The recent slew of US data releases has been quite discouraging, especially with the February Nonfarm Payrolls (NFP) report on Friday showing that the US economy added 151,000 jobs in February, compared with an expected rise of 160,000 and a previous downward revision of 125,000. The Unemployment Rate climbed to 4.1% versus expectations of 4%. The Labor Force Participation Rate ticked a tad lower to 62.4% in the same period from January’s 62.6%.

On the other hand, Fed Chair Jerome Powell stated on Friday that the US central bank would take a cautious approach to monetary policy easing, adding that the economy currently "continues to be in a good place".

Therefore, stakes are high heading into the US CPI showdown as the inflation report could shed fresh light on the direction of the Fed’s interest rates and the USD.

A bigger-than-expected cooldown in the annual headline and core inflation prints could shake off concerns over risks to the disinflation path, compelling Fed to resume rate cuts while exacerbating the Greenback’s pain.

Conversely, the US dollar would find renewed demand if the US CPI data surprises the upside. This scenario would justify the Fed’s prudence on inflation and policy outlooks, reviving hawkish Fed expectations.

Dhwani Mehta, Asian Session Lead Analyst at FXStreet, offers a brief technical outlook for EUR/USD and explains: “EUR/USD’s near-term technical picture points to a likely buyer exhaustion as the Relative Strength Index (RSI) indicator on the daily chart sits within the overbought territory above 70. However, any pullback could be quickly bought into as a 21-day Simple Moving Average (SMA) and 100-day SMA Bull Cross remains in play.”

“EUR/USD needs acceptance above the November 6 2024 high of 1.0937 to extend the uptrend toward the 1.1000 psychological level. The next relevant bullish targe is seen at the 1.1050 mark. Conversely, the immediate support is at the 200-day SMA at 1.0721, below which the March 5 low of 1.0602 will be tested. The 21-day SMA at 1.0546 will be buyers' last defence.”

Economic Indicator

Consumer Price Index (YoY)

Inflationary or deflationary tendencies are measured by periodically summing the prices of a basket of representative goods and services and presenting the data as The Consumer Price Index (CPI). CPI data is compiled on a monthly basis and released by the US Department of Labor Statistics. The YoY reading compares the prices of goods in the reference month to the same month a year earlier.The CPI is a key indicator to measure inflation and changes in purchasing trends. Generally speaking, a high reading is seen as bullish for the US Dollar (USD), while a low reading is seen as bearish.

Why it matters to traders?

The US Federal Reserve has a dual mandate of maintaining price stability and maximum employment. According to such mandate, inflation should be at around 2% YoY and has become the weakest pillar of the central bank’s directive ever since the world suffered a pandemic, which extends to these days. Price pressures keep rising amid supply-chain issues and bottlenecks, with the Consumer Price Index (CPI) hanging at multi-decade highs. The Fed has already taken measures to tame inflation and is expected to maintain an aggressive stance in the foreseeable future.

Inflation FAQs

What is inflation?

Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.

What is the Consumer Price Index (CPI)?

The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.

What is the impact of inflation on foreign exchange?

Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.

How does inflation influence the price of Gold?

Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.