The US Dollar stayed firm after a stronger-than-expected US nonfarm payrolls report, but it failed to keep rising. Markets questioned how much further investors can reprice US interest rates in a more hawkish direction.
Focus has now shifted to the US CPI release, which traders see as the next key driver for rates and FX markets. MUFG’s US strategist expects January core CPI at 0.25% month-on-month and 2.6% year-on-year, while Bloomberg consensus looks for 2.5% year-on-year for both headline and core CPI.
Dollar Focus Turns To CPI
If CPI prints above expectations, it could trigger more hawkish repricing of the Federal Reserve’s rate path and support the Dollar. If CPI meets consensus or comes in softer, markets may stick with expectations for around two Fed rate cuts this year, which would limit Dollar gains.
The article says it was produced with help from an artificial intelligence tool and reviewed by an editor.
We are in a familiar spot, similar to this time in 2025: the dollar is steady, but it lacks a clear direction. The January CPI data is now the main event, and markets are looking to it for a catalyst. This report will be important in shaping expectations for the Federal Reserve’s next step after it paused its rate-cutting cycle.
As with the strong jobs report we discussed in early 2025, January’s solid gain of 195,000 nonfarm payrolls has supported the dollar but has not sparked a big rally. One reason is that core inflation has remained sticky. The Fed’s preferred PCE measure averaged 2.8% in the final quarter of last year. Because of this, the market doubts the central bank can turn much more hawkish from here.
Options Markets Brace For CPI
For derivatives traders, this backdrop points to a focus on volatility ahead of the CPI release. A core CPI reading above the expected 0.3% month-over-month could lead to a sharp repricing. That could make long dollar call options, or short positions in EUR/USD puts, more appealing. It would also put the currently priced-in 50% chance of a June rate cut under pressure.
On the other hand, a CPI reading that is in line with expectations or softer would support the market’s view that the Fed is still on track to begin easing by mid-year. In that case, implied volatility in currency options could fall, which would favor option-selling strategies such as strangles. The dollar’s upside would likely stay limited as attention shifts back to a slowing growth outlook.
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