Inflation – Will the trend be your friend?

12 Jan 2023
Shaun Garrett

We all know by now that inflation is one of the key drivers of monetary policy and no one knows this better than Fed Governor, Jerome Powell.

As inflation peaked to 9.1% last year – the highest level in 40 years – Powell and the Fed ramped up their interest rate hiking cycle by 400 bps over the course of 2022.

As a result the dollar saw unprecedented strength. However, since inflation has peaked investors have been betting that the Fed will not have to continue on their path of “higher rates for longer” – much to the annoyance of Powell – which has caused the dollar to weaken.

Chart showing USD Index vs CPI Inflation correlation (please note inflation releases are backward looking)

Since October we have seen a significant shift in GBP/USD and the monthly inflation reading tends to produce a big reaction in the dollar. The last two inflation readings have come in below consensus showing a bigger cooling of inflation in the States. The reaction for GBP/USD on average has been almost a 2 cent move higher.

December’s inflation reading, released today at 13:30, is expected to show another big drop in inflation.

The question is…will the trend be your friend? 

October Inflation Release

November Inflation Release

Give your FX dealer a call to discuss expectations, reactions, and strategy ahead of this important data release.

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