The US dollar weakness ahead of CPI data

Today we expect the CPI and Retail Sales data at 15:30 MT time. If we look at charts, the greenback is depreciating against all currencies.

Why is it happening with the US dollar and what should we expect from the inflation data?

Let’s look at some forecasts.

Nomura predicts the deceleration of the core inflation in January. They declare monthly core CPI at 0.2% compared to the December one of 0.3%. Such reduction will lead to the annual core CPI decrease by 0.1 percentage point from 1.8% in December to 1.7% in January. Talking about the headline CPI data, they expect an increase from 0.1% to 0.4% in monthly figures and the rise of the annual to 2.0%. Such growth is based on higher gasoline prices and firm growth of food prices.

RBC has almost the same forecast as Nomura about the core and headline CPI. Moreover, RBC does not anticipate any real momentum until the second quarter of 2018. They expect that negative effects from the last year will roll off the year calculation only by that time. The annual headline inflation will be able to come closer to 3% in the third quarter.

The forecast of Barclay does not differ from the previous ones a lot. They expect the monthly core level to be at 0.2% and the annual one at 1.6%. The monthly headline inflation will increase by 0.4%, the annual by 1.9%.

The average forecast of the main economic experts declares the slight decrease of the monthly data of the core CPI growth from 0.3% to 0.2%. The headline CPI is anticipated to rise by 0.2 percentage points (0.1% to 0.3%) m/m.

Let’s sum up.

The rise of inflation is important for the US dollar. If the CPI is higher, it is more likely that the Fed will raise interest rates. An increase of the interest rates always leads to the strengthening of a domestic currency, so the greenback will have chances to strengthen its positions.

But the data is mixed, we expect the fall of the core CPI growth and the rise of the headline CPI at the same time. However, we can say that the forecasts are not negative. The fall is just by 0.1 percentage points. The annual headline CPI forecast is still below 2%, but not too much lower.

So why the dollar is weakening a lot?

The reason can be hidden in the lack of beliefs in the strong dollar. The market is used to the weak greenback, that is why every negative data can cause its further fall. Another reason is the strengthening of the global equity markets after the great selloff. Furthermore, US 10-year yields are now down to lows on the day, as Treasuries are more bid on the day.

So the greenback cannot find a support in any way.