MUFG: U.S. Inflation Data to Steer Rate Repricing

MUFG Senior Currency Analyst Lloyd Chan observes that the US dollar remained resilient after stronger-than-expected nonfarm payrolls, though it struggled to build lasting upward momentum as markets question how much further interest rates can shift in a hawkish direction. He points to the January US CPI release as the next major catalyst, noting that only an upside inflation surprise is likely to spark renewed hawkish repricing and support further dollar strength.

CPI surprise seen as key for further gains

Chan explains that while solid payroll data has eased immediate concerns about a sharp slowdown in the labour market, it has not significantly altered the broader macroeconomic outlook. The dollar held steady in the aftermath of the jobs report but failed to generate sustained gains, highlighting investor skepticism over the scope for additional hawkish rate adjustments.

Attention now turns firmly to the upcoming US CPI data, expected to be the primary driver for both rates and currency markets. MUFG’s US strategist forecasts January core CPI to rise 0.25% month-on-month and 2.6% year-on-year, with base effects boosting the annual figure. In contrast, Bloomberg consensus anticipates 2.5% year-on-year for both headline and core inflation.

From a market standpoint, inflation would likely need to exceed expectations to prompt a fresh hawkish repricing of the Federal Reserve’s rate trajectory. If the data meets or falls short of forecasts, markets are likely to stick with expectations of roughly two rate cuts this year, limiting further upside for the dollar.

Sources: Fxstreet