February CPI Expected to Show Cooling Inflation Amid Rising Stagflation Concerns
The US Consumer Price Index (CPI) report for February, scheduled for release on Wednesday at 8:30 a.m. ET, is expected to indicate a continued moderation in inflation. However, concerns over stagflation—a combination of sluggish economic growth, persistent inflation, and rising unemployment—are gaining traction among economists and market analysts.
According to economists' forecasts, headline inflation is expected to have risen 2.9% year-over-year in February, slightly below January’s 3% annual increase. On a monthly basis, prices are projected to rise 0.3%, marking a slowdown from the 0.5% increase recorded in January.
Meanwhile, core inflation, which excludes the more volatile food and energy components, is anticipated to increase 3.2% year-over-year, down from 3.3% in January. Monthly core price growth is also expected to ease to 0.3%, following a 0.4% gain in the previous month.
Fed’s Inflation Battle and Policy Uncertainty
Despite the anticipated cooling in inflation, Federal Reserve Chair Jerome Powell has cautioned that price pressures remain persistent, making the path to the central bank’s 2% inflation target uncertain.
“The path to sustainably returning inflation to our target has been bumpy, and we expect that to continue,” Powell stated last week, signaling that policymakers remain cautious about declaring victory over inflation.
The persistence of elevated core inflation, driven by shelter and service costs such as insurance and medical care, remains a primary concern. While rent inflation showed signs of easing in January—rising 4.4% year-over-year, the slowest pace in three years—economists note that price pressures in other sectors could limit the pace of disinflation in the coming months.
Rising Stagflation Concerns
Beyond inflation data, concerns over stagflation have resurfaced as economic growth appears to be slowing while inflation remains above target. Analysts cite shifting trade policies, regulatory uncertainties, and slowing global demand as contributing factors.
The recent 10% tariff increase on Chinese imports is also expected to have impacted February’s inflation data. Bank of America economists Stephen Juneau and Jeseo Park noted that tariffs likely contributed to price pressures in February, particularly in core goods categories. However, they expect some moderation in airfares, lodging, and rent inflation, which could help offset the overall impact.
“The longer that inflation runs above the Fed’s target, even if it is due to temporary forces like tariffs, the greater the chance that expectations de-anchor to the upside,” the Bank of America analysts wrote. “Were that to happen, restoring price stability would be that much harder for the Fed.”
Implications for Interest Rates
The latest CPI data will play a key role in shaping expectations for Federal Reserve policy decisions in the coming months. While markets have been anticipating potential interest rate cuts in 2025, persistent inflation could force the Fed to maintain its current stance for a longer period.
If inflation continues to moderate as expected, the central bank may feel more confident in easing monetary policy later this year. However, if price pressures remain sticky or worsen due to external factors such as tariffs, the Fed may be forced to delay rate cuts or even consider further tightening.
With inflation remaining above target and the economic outlook becoming increasingly uncertain, all eyes will be on the February CPI report to gauge the next steps for monetary policy and broader market sentiment.
Yen Carry Trade Unwind Fears Rise Amid BoJ Policy Uncertainty
The Japanese yen and Australian dollar are under the spotlight as global markets assess the impact of Japan’s producer price data, the risk of a yen carry trade unwind, and the upcoming U.S. Consumer Price Index (CPI) report.
BoJ Rate Hike Bets Depend on Producer Price Data
Japan’s Producer Price Index (PPI) report, scheduled for release on March 12, could shape expectations for the Bank of Japan’s (BoJ) monetary policy and influence the USD/JPY exchange rate. Economists forecast a 4% year-over-year increase in producer prices for February, down from 4.2% in January.
A weaker-than-expected reading could reduce speculation about a potential BoJ rate hike in the first half of 2025, as it would signal slowing inflationary pressures. In such a scenario, the BoJ may adopt a more cautious stance, potentially allowing USD/JPY to approach the 149.358 resistance level.
Conversely, if producer prices rise more than expected, the BoJ could face greater pressure to tighten monetary policy, raising the likelihood of an interest rate hike in the coming months. This could drive USD/JPY lower, with the pair potentially breaking below the March 11 low of 146.437.
Yen Carry Trade Unwind: A Risk for Markets
A stronger Japanese yen has reignited concerns about a carry trade unwind, a phenomenon that previously led to sharp market movements.
In July 2024, the BoJ hiked interest rates and reduced Japanese Government Bond (JGB) purchases, leading to a surge in yen demand. This triggered a broad sell-off in risk assets, including emerging market currencies and equity markets, as investors unwound yen-funded carry trades.
Market analysts, including Robin Brooks, Senior Fellow at the Brookings Institute, have drawn parallels between current market conditions and the events of mid-2024.
“Towards the end of July 2024, there was a flash crash in $/JPY that saw the Yen strengthen sharply. That sparked an unwind in Yen-funded carry trades and – as a result – a general ‘risk-off’ sentiment that hit many risk assets,” Brooks noted.
If similar conditions arise, the BoJ may delay or downplay any near-term policy tightening to prevent excessive market volatility, potentially providing short-term support for USD/JPY.
US CPI Report and the Fed’s Rate Path
The upcoming U.S. Consumer Price Index (CPI) report, due later in the day, is expected to have a significant impact on USD/JPY trends. Markets anticipate a 3.2% year-over-year increase in core inflation for February, slightly lower than January’s 3.3% rise.
A larger-than-expected decline in inflation would reinforce expectations that the Federal Reserve could cut interest rates as early as June 2025. This could lead to a weaker U.S. dollar, pushing USD/JPY below the key support level of 146.537, and possibly testing 145.
On the other hand, a hotter-than-expected CPI print could reduce the likelihood of Fed rate cuts in Q2 2025, supporting a stronger dollar. In this scenario, USD/JPY may climb toward 149.358 and potentially test the psychological 150 level.
Australian Dollar Outlook: Trade Policies and China’s Stimulus
The USD/JPY trend and BoJ’s monetary policy decisions will have broader implications for risk-sensitive assets, including the Australian dollar.
However, the AUD/USD exchange rate is also heavily influenced by U.S.-China trade relations and Beijing’s economic stimulus policies.
- A de-escalation in U.S.-China trade tensions could support Chinese economic growth, boosting demand for Australian exports and strengthening the Aussie dollar.
- On the other hand, escalating trade disputes or delays in China’s stimulus rollouts could weigh on the Australian economy, pushing AUD/USD lower toward the $0.62 support level.
Market participants will closely monitor upcoming developments, with the U.S. CPI report and China’s economic policies playing a pivotal role in shaping AUD/USD trends in the near term.
Silver Rally Gains Momentum Amid Gold Strength and Weaker Dollar
Silver prices surged past key resistance at $32.53, supported by a rising gold market and a weakening U.S. dollar. The metal tested support at $31.81 before climbing to $32.95, marking a 2.61% gain on the day.
Technical indicators suggest further upside potential, with silver eyeing the next resistance levels at $33.21 and $33.39. A breakout beyond these points could push prices toward the October 2024 high of $34.87.
Gold’s 1% gain on Tuesday, driven by global economic uncertainty and a softer dollar, further bolstered silver’s bullish momentum. Meanwhile, traders are closely watching upcoming U.S. inflation data, as shifts in Federal Reserve policy expectations could influence silver’s trajectory.
With strong technical support in place, analysts anticipate continued gains, provided silver holds above its 50-day moving average. Market participants will monitor inflation reports and dollar trends for further direction.
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