This week will be the hotly awaited US CPI print. Since the really strong NFP print from February 3 Fed expectations have changed. The Terminal rate is now projected to be at 5.15% by short-term interest rate markets. For only the second time in 25 years, the job number exceeded maximum expectations by over 200K.

This kind of print was so large, it was difficult to know what to do with it. Jerome Powell acknowledged it on February 7, but he too was surprised. On February 8 we had four Fed speakers who continued to repeat that the Fed’s fight against inflation was not over. Don’t forget too that on the same day the NFP print was released, the US ISM Services PMIs also came out really hot. In fact, we are seeing a divergence between US manufacturing and US services new orders. Look below to see the wide jaws emerging.

So, what does this mean for US CPI?

The reason that the Fed eyes wage data is that it sees it as a major inflationary force. Higher wages lead to higher prices and a tighter labour market leads to higher wages. It’s an inflationary circle that comes when there are more jobs than workers. So, it all means that inflation is once again in key focus. The risk is that if inflation picks up the Fed will need to hike rates more aggressively to calm surging inflation. So, high inflation will likely strengthen the USD and lower inflation will allow markets permission to reduce Fed pricing once again. At the time of writing, STIR markets now see 5.13% terminal rates and one cut into year-end. This is up from a 4.88% terminal rate and 2 cuts into year-end.

US inflation expectations for a potential scalp

• If the headline comes in below 6% and the core below 5% expect an immediate upside in EURUSD.
• If the headline comes in above 7.1% and the core above 6% then expect an immediate downside in EURUSD.

Expectations for next week’s US CPI are for both prints to fall below the prior, so that should weaken the USD into the event and lift EURUSD in the meantime. However, the outlook is prone to risks as Fed speakers can easily change that with some more hawkish rhetoric.