Today’s release of Consumer price index (CPI) numbers from the United States will be most watched data by traders and investors. CPI is scheduled to be released at 12:30 GMT. Today’s CPI figure, if turns out to be very good should be enough for Fed to go for a hike next week.

Why important?

• Fed’s dual mandate is price stability and maximum employment. However, The unemployment rate has now reached 4.9 percent in the US, which is considered as very close to long-term unemployment level, consistent with Fed’s dual mandate. That leaves inflation to be most vital for subsequent hikes.

• Several Fed policymakers have indicated that without a pickup in inflation, there would be no rate hikes. However, September FOMC was quite divided in their opinion.

• Moreover, inflation numbers will be a key determinant of exchange rate divergence among major economies.

Past trends –

• After staying below FED’s 2 percent target, headline CPI fell to negative territory in the final quarter of 2014. In January CPI fell by -0.7 percent on monthly basis, mostly due to lower energy prices. Yearly CPI fell by -0.1 percent y/y in January.
• Yearly change in CPI has been minimal since then, growing about 0.04 percent per month.
• Yearly CPI growth was +0.7 percent in December, the first sign of a comeback. In Mach, it showed further signs of bounce back, with 0.9 percent y/y. Consumer price index was up 1 percent in June and 0.8 percent in July on a yearly basis. In August it picked up further to 1.1 percent y/y.
• In addition to that, core CPI has been showing remarkable resilience, monthly growth not falling below zero since February 2010. In March, it grew 0.1 percent m/m and 2.2 percent from a year back and in June it grew by 2.3 percent. In August, it was up 2.3 percent y/y.

Expectation today –

• CPI is expected to grow 0.3 percent m/m and rise by 1.5 percent on yearly basis.
• Core CPI is expected to grow at 2.3 percent on yearly basis.

Impact –

• The dollar is likely to grow stronger if the CPI figure surprises on the upside and we expect the number of policymakers voting in favor of a hike to increase at the November FOMC meeting. The dollar index is currently trading at 97.78, down -0.08 percent, so far today. As of now, the market is pricing one hike and that in December but a better CPI would surely raise the prospects of a hike in November.