A slowdown in US inflation will weaken the dollar

Yesterday's speech by Fed Chairman J. Powell reassured the markets again, allowing them to resume growth. In his speech, he confirmed the expectations of the markets that the American regulator will proceed from the development of the situation in decisions on rates and will act "quickly and flexible." He noted that the markets are too pessimistic about the prospects for the American economy, which, in his opinion, is unjustified. On the whole, his rhetoric was positive and was not filled with promises of the continuation of interest rates that would be mandatory this year.

In the wake of Powell's speech, the dollar received short-term support on Thursday, but already today its decline has resumed in the Asian trading session. Today, the focus of the market will be the publication of updated data on consumer inflation in the United States. They will undoubtedly have a noticeable impact on the market.

According to the forecast, inflation pressure is expected to decrease in annual terms to 1.9% from 2.2%. It is assumed that in December, the consumer price index fell by 0.1% from the November zero value. At the same time, it is assumed that the basic consumer price index will maintain its monthly dynamics of 2.2%.

How can the dollar react to the publication of these data, and what should be expected from financial markets?

In our opinion, if the data turns out to be in line with the forecast or demonstrates a weakening of inflationary pressure, this will have a negative impact on the US dollar rate and support the demand for risky assets in the markets. At the same time, if the values of consumer inflation, on the contrary, demonstrate its strengthening, we should expect a drop in market hopes that the Fed will stop raising interest rates this year. This will lead to sales in the markets of risky assets, first of all, company shares, and an increase in the dollar rate. But the likelihood of a second scenario remains low, so most likely we will see continued growth in demand for companies' shares, commodity market assets and a local weakening of the dollar.

Forecast of the day:

The EUR / USD currency pair can get support on the wave of data on consumer inflation in the US if its slowdown is confirmed by data published today. Overcoming the price level of 1.1525 may lead to its continued growth to 1.1600-15.

The currency pair USD / CAD "lies" at the level of 1.3200. The negative inflation data for the US dollar may push the pair down to 1.3140 after it consolidates below 1.3200.

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The material has been provided by InstaForex Company - www.instaforex.com