Key Focus: US January CPI Inflation and Its Market Impact on USD, Cryptos

In a while, we will get the US January inflation report, which might rattle stock, crypto and currency markets if numbers miss expectations.

The upcoming US January CPI report is set to be a major market mover, with the potential to shift expectations around the Federal Reserve’s rate-cut trajectory. This report carries additional weight due to seasonal factor revisions, which could lead to significant adjustments that markets may not have fully accounted for.

Historically, January tends to show outsized price increases, making it a particularly challenging month to forecast. Over the past three years, inflation spikes in January have been unusually large, largely due to price resets at the start of the year. Nearly half of all annual price increases take effect in Q1, with a concentration in non-market inflation categories, such as healthcare and insurance costs, which tend to lag behind real-time economic trends.

The Importance of Q1 Inflation & Rate Cut Expectations

While the broader market is currently more focused on tariff developments and political uncertainty, Q1 inflation remains a key determinant of rate expectations. As of now, only 42 basis points of easing are priced in for the year, meaning that a hotter-than-expected CPI print could reinforce hawkish sentiment and support US dollar strength.

In 2024, a single hot CPI report led to a 19 basis point reduction in year-end rate cut pricing, highlighting how sensitive markets remain to inflation surprises. Given that January CPI has historically caught investors off guard, any unexpected upside in inflation could delay rate cut expectations further and rattle equity markets.

Looking Ahead: Will the “January Effect” Strike Again?

With seasonal adjustments now incorporating three years of elevated inflation data, there is a chance that the pendulum swings the other way, potentially leading to a milder CPI print. However, some analysts fear that the so-called “January effect”, which drove inflation concerns last year, could reappear.

As markets brace for Wednesday’s release, the US dollar remains positioned to strengthen if inflation surprises to the upside. On the other hand, a cooler-than-expected print could ease pressure on the Fed, allowing for a more dovish pivot in the months ahead. Either way, the CPI report will set the tone for rate expectations and broader market sentiment moving forward.