On Monday, the U.S. dollar (USD) showed volatility due to important data expected this week that will influence monetary policy. For this reason, two members of the U.S. Federal Reserve will be speaking this week to keep calm ahead of the release of January’s Consumer Price Index data. Revisions made on Friday last week, which employed a new calculation method, point to further disinflation. Therefore, any further disinflation could mean that the U.S. dollar could weaken in the future.
While the dollar moves cautiously, stock markets remain at two-year highs.
European market bourses rose earlier in the day, with others holding steady at their highest levels in nearly two years, as investors await U.S. inflation data.
The S&P 500 index rose and surpassed 5,000 points for the first time in its history last week, fueled by gains in global and technology stocks for three consecutive weeks despite rising U.S. Treasury yields.
U.S. medium-term inflation expectations reach the lowest level in 11 years
Despite the strong performance of stocks, inflation plays a vital role for both the dollar and the equity market.
The U.S. Federal Reserve’s (Fed) most recent survey revealed that the country’s medium-term consumer inflation expectations have dropped to their lowest since 2013. January’s three-year inflation rate decreased to 2.35%, marking an 11-year low, as per the New York Fed’s Survey of Consumer Expectations. Furthermore, the survey indicated that the one-year and five-year inflation expectations remained stable from the previous year, at 3% and 2.5%, respectively.
The data will reassure Fed officials as they seek more market confidence that inflation will reach its 2% target level before making interest rate cuts. For now, investors believe the Fed is likely to make its first cuts by May.
The survey also shows people’s outlook for inflation for frequently purchased goods, such as gasoline and food, was lowered in the January survey. For example, the projected price change for gas next year was reduced to 4.2%, the lowest level since December 2020. The food change decreased by 4.9%, the weakest since March 2020.
Attention is focused on Producer Price Index (PPI) inflation
The anticipation of continued disinflation has spurred a rebound in stocks and major market indices, while also enabling the dollar to sustain gains against other major currencies.
The PPI is expected to increase by 0.1% month-on-month for both headline and core figures. On a year-on-year basis, the PPI is forecasted at 0.6%, down from 1.0% last month, with the core PPI anticipated to be 1.6%, a decrease from 1.8% in the previous month.
