Today, one of the most important events of the day seems to be the publication of inflation data in the United States. It may have an impact on the Federal Reserve's further actions, and before that on investors' expectations of those actions. As a result, the US dollar, stock market indices, commodities or cryptocurrencies may react equally to the US data reading.
Fed reaction to US inflation
US consumer inflation rose to 9.1 percent in June, the highest in more than 40 years. The sharp increase in price dynamics in the economy may have triggered action by the Fed, which is tasked with keeping inflation near 2 percent. Thus, the US Federal Reserve began a cycle of interest rate hikes to cool the economy and bring US inflation back to target. As recently as January of this year, interest rates in the United States were near zero.
In three quarters, the range for the federal funds rate rose to 2.25-2.5 percent, and the market assumes with 88 percent probability that the Fed will make another 75-bp hike as early as September 21 to a range of 3.00-3.25 percent. Currently, the possibility of completing the cycle of hikes is priced in the region of 4 percent.
Such a rapid pace of interest rate hikes in the United States, along with a growing risk aversion that could be linked to both the uncertain future of global economic growth and the outbreak of war in Europe, may have fueled the USD appreciation seen in recent quarters.
Source: Conotoxia MT5, USDIndex D1
US inflation expectations
The market consensus is for US inflation to fall to 8.1 percent in August, down from 8.5 percent in July. The market seems to be counting on a deceleration in inflation, which may be reflected in the recent behavior of the dollar or stock market indices. The U.S. currency seems to have been losing value for the past few days, while indexes seem to have rallied. Data from the Federal Reserve Bank of New York's Microeconomic Data Center may also show a potential peak in U.S. inflation.
Monday's report showed that inflation expectations in the United States have declined further across all time horizons. The median one-year inflation expectations fell to 5.7 percent in August from 6.2 percent in July, while the median three-year inflation outlook declined to 2.8 percent in the aforementioned period from 3.2 percent recorded a month earlier. In addition, the median five-year inflation expectations fell to 2 percent in August, down from the 2.3 percent recorded in July.
Is USD weakness only temporary?
According to HSBC, the euro's recent rally against the dollar may be driven by the closing of previous short positions, rather than a change in fundamental factors. As a result, the euro may come under pressure again, HSBC's Paul Mackel told Bloomberg TV. He added that the outlook for EUR/USD comes down to which central bank can actually deliver rate hikes. "The ECB is talking very hawkish, but will it be able to meet market expectations for rate hikes? We would oppose it."
In contrast, according to a Credit Agricole CIB analyst quoted by Bloomberg, the dollar is in retreat ahead of the CPI reading from the US, but also because the EUR is getting a boost from more positive sentiment regarding the Ukraine crisis. He added that the currency market seems to be positioning for a lower CPI reading from the US.
What data will be released today? This is what we will find out today at 14:30 GMT+3. You can read the publication of US inflation data from the economic calendar on our website.
Daniel Kostecki, Director of the Polish branch of Conotoxia Ltd. (Conotoxia investment service)
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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