Global financial markets will be fully focused on the publication of the US Consumer Price Index (CPI) data for December, which is scheduled to be announced at 9.30pm tonight (Tuesday).
This data is one of the most important inflation indicators in assessing the Federal Reserve's (Fed) stance ahead of the Federal Open Market Committee (FOMC) meeting on January 29.
The CPI is often used by the Fed as a key reference to assess price pressures in the economy, thus influencing monetary policy decisions including the direction of interest rates. Therefore, any surprise in this data reading has the potential to trigger significant movements in the global currency, bond and equity markets.
According to market analysts' expectations, the annual CPI for December is projected to remain at 2.7%, unchanged from the previous month's reading.
However, the main attention is focused on the core CPI, which does not take into account food and energy prices, where it is predicted to increase to 2.8% from 2.7% previously. An increase in core CPI is often seen as a signal of more persistent and difficult-to-control inflationary pressures.
From a monetary policy perspective, the Fed is currently in the process of assessing whether existing interest rates are tight enough to ensure inflation returns to its 2% target on a sustainable basis. If CPI data, particularly core CPI, shows an increase or remains high, it could reinforce the Fed's stance to keep interest rates high for longer, thus ruling out any rate cuts in the near term.
In a situation where the CPI reading is higher than expected, the market is likely to interpret it as a hawkish signal from the Fed.
This could lead to a strengthening of the US dollar (USD) as expectations of prolonged high interest rates return to dominate market sentiment. At the same time, riskier assets such as stocks and gold could potentially come under pressure.
On the other hand, if the CPI reading is lower than expected, particularly involving core CPI, it would provide a sigh of relief to the market. This scenario could revive speculation that the Fed is getting closer to easing monetary policy.
As a result, the USD could weaken as investors begin to reassess the possibility of an interest rate cut as early as the first half of this year.
Overall, the December CPI data is not just a monthly inflation figure, but an important component in shaping Fed policy expectations ahead of the January FOMC meeting.
With the market currently in a sensitive phase to any monetary policy cues, the reaction to this data is expected to remain volatile, particularly involving USD movements in the near term.
