All eyes this week will be on the US CPI data due tomorrow. The Fed has already came out to talk the talk, so it is now time for the data to walk the walk. The odds of a March rate cut have basically evaporated after the last Fed meeting. It is now at a measly ~18%, after Powell said that such a scenario is not the base case at the moment.

But will a softer set of inflation numbers this week reignite the aggressive market pricing that we saw previously?

Headline annual inflation is expected to fall to 3.0% from 3.4% in December. However, the core reading is expected to remain stickier at around 3.8% - compared to 3.9% in December.

US core CPI year-on-year (%)

If matching estimates, it reaffirms a gradual easing in price pressures but perhaps still nowhere quick enough to warrant a rate cut in March. The question in the next few months is whether or not inflation developments will see the Fed cut in May or June. The odds of the former are at ~74% currently.

So, the data tomorrow isn't so much so just a litmus test for March. It will also act as a litmus test for the Fed outlook for the remainder of 1H 2024.

And in the context of trading this week, this won't be the only big data to watch from the US. There is also retail sales on Thursday and then producer prices on Friday as well.