FX Daily: Lower US Inflation Could Spark Real Rate Debate

FX Daily: Lower US inflation can ignite real rate discussion

We're expecting core US CPI inflation to be in line with the consensus of 0.3%, but our economists say it could be lower. If so, a declining real policy rate would be increasingly hard to justify should the American economy start to cool. Romania should keep rates unchanged, and PLN is heading for new gains.

 

USD: CPI test in focus

A decent start of the week for bonds and European equities has helped Scandinavian currencies outperform amid a generally quiet start to the week as data calendars in key developed markets were empty yesterday, and some 'wait-and-see' approach ahead of today’s US CPI release.  

Our economists expect a 0.3% MoM core CPI print today, in line with market expectations. US CPI has been recording faster monthly rises than the PCE (preferred by the Fed as an inflation measure), primarily due to the higher weighting of housing and vehicles in the basket. While rents are decelerating, the structure of the CPI series implies these changes take time to reflect in official data. In YoY terms, CPI inflation should come at 3.7% today, even though our economists highlight a greater chance of a lower number than a surprise on the upside.

The hawkish repricing of Fed rate bets hinges on expectations that inflation has remained relatively sticky in January. Despite the strong NFP and ISM numbers, faster-than-expected disinflation would bring the real rate discussion to the fore. A rising real policy rate would become increasingly hard to justify as growth should soften materially in 2024.

We see the rate-cutting cycle in the US starting in May: markets are currently pricing in June as the start-point, but we reckon the risks of a softer CPI print and weak retail sales to revamp expectations for an earlier cut. The dollar is facing asymmetrical risks skewed to the downside this week, but the magnitude of those risks still looks limited. The strong labour market should still hinder further dovish repricing, and we think the dollar will not capitulate before the second quarter