The Interconnected Impact of US Inflation: Driving the Dollar, Shaping USDJPY, and Influencing Gold

American Annual Inflation Is Expected at 13.30 GMT This Afternoon

A critical release for most financial markets. The figure is perhaps even more important than usual because expectations are growing that the Fed might have to tighten further and hold rates higher for longer given January’s strong job report.

This article summarizes the situation and considers possible movements by gold and dollar-yen this afternoon.

Inflation in the USA has been slowing since June of last year. This is a natural reaction to the Fed’s aggressive tightening over the same period, but the decline hasn’t been consistent:

American annual non-core inflation. 

Although inflation has certainly declined, it remains more than triple the usual target of approximately 2%.

Adding to the importance of today’s release is the extremely and unusually strong result from January’s job report which was released on Friday 3 February:

Non-farm payrolls.

517,000 for the NFP was more than double the consensus and at first glance definitely suggests more strength in the American economy than had been expected in December and January.

It would be possible to see this reflected in higher inflation than expected today, but the exceptionally large divergence between the actual figure and the consensus for the latest NFP might suggest that it could be revised down next month.

Annual non-core inflation is expected at 6.2% compared to the previous 6.5%, while the core figure has a consensus of 5.5% compared to the previous 5.7%. If there’s a surprise, it seems more likely to be higher than lower, but normally one would prefer to wait for the actual figure and trade based on that rather than speculate with a position ahead of the release.

It’s questionable how much a surprising figure this afternoon would affect the consensus for the Fed’s next meeting on 22 March.

Currently another single hike is expected by around 90% of participants, which would take the funds rate to 4.75-5%. A shift in expectations to a double hike would probably need a significantly higher figure for inflation than currently expected.

Gold-Dollar, Daily

There seems to be some opportunity for gold to move lower if the release is higher than expected, not least because the uptrend that was in place from November of last year might be over.

The price seems to have broken through the 50-day moving average from Bollinger Bands and ATR has increased in February so far.

Gold’s negative reaction to the latest NFP was quite strong, so it might be similarly active this afternoon, especially if the actual figures for inflation are more than 0.1% different from the consensus.

Given oversold conditions, there might not be extended follow-through on losses if the release is higher and participants expect the Fed to be more hawkish, but the 38.2% weekly Fibonacci retracement could be in view as a support in that situation.

Dollar-Yen, Daily

The picture on the chart of USDJPY is less negative in February so far compared to last quarter although this symbol’s reaction to the latest job report was significantly weaker compared to gold.

Speculation on the new leadership of the Bank of Japan from April increased earlier this month, with news being reported yesterday that Kazuo Ueda is likely to be nominated as the next governor.

Dr Ueda might be less dovish than the ‘default’ candidate, Masayoshi Amaniya, but this probably wouldn’t translate into a very clear change in policy by the Bank of Japan in the near future.

With dollar-yen having moved back above the 50 SMA from Bands and intraday sellers being overpowered last week, the 100 SMA slightly above ¥136 could be the next important resistance.

To the downside, a move below ¥127 is unfavorable with that area having been a support since the second quarter of last year. As above, waiting for the actual figure for inflation and trading based on the direction of the main reaction to it would usually be preferred to trying to find a position immediately.

The opinions in this article are personal to the writer. They do not reflect those of Exness or FX Empire.