The incoming US CPI data is set to provide a major steer for markets still gripped by the Fed’s ongoing battle against inflation. Risk assets have been reluctant to make sizeable moves of late, as they brace for what could be a blowout January inflation report following blockbuster jobs figures from the same month.
Should the inflation data remain elevated and defy the Fed’s 450bps of interest rate hikes thus far, CPI weighting and methodology changes notwithstanding, that might prompt policymakers to raise rates even more. A major repricing for a higher US rates peak is likely to extend the dollar’s rebound while unwinding more of the year-to-date gains seen in risk assets.
On the other hand, further moderation in consumer prices should give more license for the likes of stocks, gold, and even cryptos, to keep fighting the Fed’s hawkish narrative. However, riskier assets may only receive the all-clear to march sustainably higher once the Fed can officially pause this rate hike cycle, which could open the door to the idea of an eventual dovish pivot.
