The CPI surprised to the upside in January as the headline gauge printed at 2.1%y/y versus 1.9% expected, while the core measure, which excludes the most volatile components came in at 1.8%y/y versus 1.7% median forecast. Investors reacted quite strongly as they adjusted their positioning in anticipation of a steeper monetary policy path. This surprise triggered a US dollar rally but it was ephemeral as retails sales came in well below expectation. However, today is another story.
According to the latest survey, market participants do not expect that those conditions have persisted in February. The core measure is expected to stabilise at 1.8%y/y, while the headline gauge should increase slight to 2.2%y/y from 2.1% in January. Unlike last month, February retail sales will not be released on the same day. It means that traders will most likely react strongly in case of a surprise reading. Indeed, February retail sales will be release tomorrow.
This is the last CPI report before the March FOMC meeting; it will therefore be closely monitored. We remain sceptical about another upside surprise in inflation reading. The risk to the core CPI is roughly balanced with slight downward skew. Since the beginning of the week, EUR/USD has been trading sideways around 1.2420. The closest resistance lies at 1.2446 (high from March 8th), while on the downside a support can be found at 1.2273 (low from March 9th). We maintain our bullish medium-term view on the pair. However, we expect that the greenback will appreciate against the Swiss franc and the Japanese yen as investors continue to load on risk.