The CPI report is due on Friday
The US Bureau of Labor Statistics isn't closed due to the government shutdown so that means Friday's consumer price index report will be released on schedule at 8:30 am ET (1330 GMT).
Inflation is facing the sudden drag of rapidly declining oil prices. Crude fell 45% from September to December and energy prices are a significant chunk of the inflation report.
The consensus is for a 0.1% m/m decline in prices in what would be the first drop since March. Some estimates range as low as 0.3% while +0.1% is the high. In year-over-year terms, prices are expected up 1.9% compared to 2.2% in November but the consensus is almost evenly split between 1.8% and 1.9%.
Watch the headlines, if it's 1.8% the market will further put the brakes on the idea of Fed hikes. In turn, the dollar may come under renewed pressure especially against the euro and commodity currencies.
Core inflation will be equally concerning for the market, if not moreso.
CPI ex-food and energy is expected at:
+0.2% m/m vs 0.0% prior
+2.2% y/y vs +2.2% prior
Once again, economists are split between 2.1% and 2.2% y/y so there is a downside bias.
The US dollar has had a sluggish start to the year with declines against most currencies. It's also facing a headwind from a dovish Fed. A soft CPI report could further reinforce the conviction from the Fed doves that there is no rush to hike rates.
In turn, dollar positioning is still crowded in part due to structural carry trades along with the US dollar's 'high yield' status.