December inflation data will be released today at 13:30 GMT. The inflation figures kick-start the coming year for investors who are waiting for guidance on when the Federal Reserve will begin to cut interest rates.
December's consumer price index is expected to show a slight increase in annualized inflation to 3.2%, up from 3.1% seen a month earlier. But if the volatile food and energy prices are excluded, economists expect core inflation to fall to an annualized rate of 3.8% from 4.0% a month earlier.
The results will be crucial for investors who, since the last Consumer Price Index (CPI) report, have increasingly priced in the chances of a soft landing, with inflation falling to 2% without an economic slowdown. Such a result could mean that the central bank's campaign to raise interest rates is over and that the regulator could begin to cut rates, reducing the cost of borrowing for businesses and consumers.
On a monthly basis, economists expect prices to rise 0.2% in December, up from the 0.1% seen in the previous month. Meanwhile, they forecast core inflation to rise 0.3% on a month-over-month basis.
According to CME's FedWatch tool, as of noon Wednesday, markets estimated the probability that the Fed will cut interest rates in March to be about 67%.
While markets have been aggressively pricing in the likelihood of an interest rate cut, Fed officials have been more restrained.
In a separate statement on Monday, Atlanta FRB President Raphael Bostic noted that “we are in a restrictive stance and I’m comfortable with that, and I just want to see the economy continue to evolve with us in that stance and hopefully see inflation continue to get to our 2% level.”
The Fed's cautious approach, coupled with the fact that there will be occasional moments when temporary spikes in inflation above forecast estimates will appear on the overall trajectory of CPI decline, will support the dollar, and thereby support the GBPUSD currency pair.
The final recommendation is to sell GBPUSD provided that the actual CPI estimates come out above forecasts.
The profit could be fixed at the level of 1.275. Loss — at the level of 1.278.
This content is for informational purposes only and is not intended to be investing advice.
