​​US inflation preview: January CPI data to test Fed rate cut expectations​

​​​What to expect from January's CPI report

The upcoming US inflation report is expected to show the headline consumer price index (CPI) increasing by 0.3% month-on-month (MoM), slightly down from December's 0.4% rise. This would keep the year-over-year (YoY) rate steady at around 2.9%.

Core inflation, which excludes volatile food and energy prices, is forecast to rise by 0.3% MoM.

Recent tariff implementations on steel, aluminium, and Chinese goods could contribute to higher input costs, potentially pressuring prices upward through supply chains. The strong January jobs report, showing unemployment at 4% and robust wage growth, suggests inflation might remain sticky, particularly in services.

Market implications for stocks and indices

A hotter-than-expected inflation print could trigger renewed concerns about prolonged restrictive monetary policy. This would likely impact indices trading. Growth and technology stocks may face particular pressure if inflation runs high, as these sectors tend to be more sensitive to interest rate expectations.

Corporate margins could face pressure if companies struggle to pass on increased costs, which might weigh on forward guidance and earnings expectations. However, if CPI matches or comes in below expectations, markets could rally on hopes that the Federal Reserve's (Fed) tightening cycle is nearly complete.

Currency market response

The US dollar's reaction will be crucial for forex trading participants, with an upside surprise likely boosting the greenback as rate cut expectations are pushed back. Trade-exposed currencies like the euro and Australian dollar could face pressure if the dollar strengthens on higher inflation readings.

A softer CPI print might pressure the dollar lower, particularly benefiting the Japanese yen as markets factor in potential Bank of Japan (BoJ) policy shifts. Currency volatility could increase around the release as markets digest the implications for monetary policy divergence.

Bond market dynamics

Treasury yields could push higher if inflation proves sticky, as markets adjust expectations for a longer period of elevated rates. The commodity trading space might see increased activity as investors seek inflation hedges. A downside surprise in inflation could trigger a bond market rally, pushing yields back toward recent lows. The movement in yields will be particularly important given the recent shift in rate cut expectations following the strong jobs report.

The January CPI reading could significantly impact market direction across multiple asset classes. Remember that volatility often increases around major economic releases, so proper risk management is essential.