💲 The US dollar is preparing for significant fluctuations after the US inflation report
Will high inflation confuse the market ahead of the Fed’s decision?
- The US CPI inflation report for August will be released today at 14:30.
- Headline inflation is expected to recover significantly and the monthly reading is high.
- However, core inflation is expected to continue to decline, with monthly core inflation “closer” to the Fed’s 2% inflation target.
- This will be the last significant macroeconomic reading before the Fed’s decision next week. Inflation in August is expected to be significantly higher.
Expectations from today’s reading:
- CPI inflation is expected to rise to 3.6% YoY from 3.2% YoY.
- Monthly inflation is expected to rebound to 0.6% month-on-month, up from the previous rise of 0.2% month-on-month. This is due to oil prices.
- Core inflation is expected to ease back to 4.3% y-o-y from 4.7% y-o-y.
- Monthly core inflation is expected to rise 0.2% month over month, the same as the previous month, in line with the Fed’s 2% target for core inflation on an annualized monthly basis.
- According to Bloomberg, deflationary factors will be cars and rents (falling car prices and reduced growth in real estate values).
- However, the Cleveland Fed’s model suggests a stronger monthly rise in inflation to 0.8% month-on-month, which could lead to a rally in the dollar and raise investor expectations for a possible Fed rate hike next week.
- Bloomberg highlights the potentially greater impact of rising energy prices in the summer due to high air conditioning-related consumption.
- Bloomberg also sees the potential for a rebound in monthly service inflation, driven by strong demand for hotels and restaurants in major U.S. cities that have hosted big concerts from stars such as Taylor Swift and Beyoncé. Interestingly, the recent unexpected rise in inflation in Sweden is attributed to concerts and related services.
The monthly rise in CPI inflation is likely to be the highest since mid-2022, but it is important to note that this will be due to seasonal factors and a clear recovery in oil prices in the previous month, which will continue into September. The market may interpret today’s headline inflation data as an opportunity for a Fed rate hike, but keep in mind the recent slowdown in the labor market and a significant decline in core inflation. Only significantly higher-than-expected core inflation could change the prevailing sentiment at the Federal Reserve. At the moment, market expectations do not indicate that the Fed will raise interest rates next week, although this cannot be ruled out before the end of the year.
Leading inflation indicators such as US gasoline prices and the ISM Service Price Index indicate that the next two inflation indicators are expected to be higher. However, the recovery of inflation will also occur due to basic factors. It is worth noting that inflation peaked at 9.1% year-on-year in June 2022, while inflation in August 2022 was 8.3% year-on-year.
EURUSD
The EURUSD pair is consolidating at current levels without significant movements. Investors are waiting for data on the consumer price index, so until then they should not expect increased volatility. However, if the consumer price index turns out to be higher than expected, this could cause a sharp strengthening of the dollar and a decline in the EURUSD currency pair. On the contrary, lower values could negate the chances of the Fed raising interest rates at the next meeting and lead to growth in the EUR/USD pair. Source: xStation 5
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