US inflation might support Dollar

Today's release of Consumer price index (CPI) numbers will be most watched by traders and investors ahead of next month's FOMC rate decision. CPI is scheduled to be released at 13:30 GMT. However today's CPI figure, may turn out to be a non-event for the market as FED is widely expected stay hold.

Why important?

• FED's dual mandate is price stability and maximum employment. However, Unemployment rate has now reached 5% in 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 pickup in inflation, there would be no rate hikes.

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

Past trends 

• After staying below FED's 2% target, headline CPI fell to negative territory in final quarter of 2014. In January CPI fell by -0.7% on monthly basis, mostly due to lower energy prices. Yearly CPI fell by -0.1% YoY in January.
• Yearly change in CPI has been minimal since then, growing about 0.04% per month.
• Yearly CPI growth was +0.7% in December.
• However, core CPI has been showing remarkable resilience, monthly growth not falling below zero since February 2010. In December, prices grew by 0.1% m/m and 2.1% from a year back.

Expectation today -

• CPI is expected to remain to decline by -0.1%m/m and rise by 1.3% yearly basis.
• Core CPI is expected to grow at 2.1% on yearly basis.

Impact 

• Due to base effect, CPI is likely to come better in January however without significant improvement CPI may not boost Dollar beyond initial buying spree.
• If core CPI, deteriorates, Dollar is likely to suffer and bets over FED easing likely to go up.

Dollar index is currently trading at 96.8, flat for the day.