Looking for another economic event to trade this week? Uncle Sam’s printing the July CPI readings on Wednesday so y’all better check out my Forex Trading Guide for this release. Let’s go through our usual routine, shall we?
Why is this report important?
Apart from showing whether or not central bank officials might make monetary policy adjustments in the name of price stability, CPI readings are a huge deal for the Fed since policymakers have specified that they’d like to be “reasonably confident” that inflation would move closer to their 2% target before hiking interest rates. In addition, commodity price tumbles have proven to be troublesome for most major economies these days so it will be interesting to see if the U.S. has managed to stay resilient.
What happened last time?
The release of the inflation reports for June wasn’t accompanied with much forex fanfare since the headline and core CPI simply came in line with expectations. The headline CPI showed a 0.3% gain, weaker compared to the previous month’s 0.4% rise, while the core version of the report showed a 0.2% increase, stronger than May’s 0.1% uptick.
Looking at the reaction from the U.S. dollar index reveals that the currency was able to advance against most of its forex peers during the release since it showed that the economy was making baby steps towards the annual 2% inflation target. So far, the core CPI is up by 1.8% on a year-over-year basis.
What’s expected this time?
For the month of July, both headline and core inflation are expected to have picked up by 0.2%. If so, this would mark the sixth consecutive month of gains for the headline CPI this year.
Keep in mind, however, that energy prices started another leg lower last month when commodities showed more signs of weakness. This probably put a noticeable drag on headline inflation but not so much on the core CPI, which strips out volatile items such as food and energy costs from the calculations.
How might the Greenback react?
Stronger than expected results could convince most forex junkies that the U.S. economy can sustain its pace of recovery, eventually leading Fed officials to give the go signal for a rate hike sometime this year. This might spur strong gains for the Greenback, which is gaining support from positive U.S. economic data.
On the other hand, weak inflation data could dampen rate hike expectations, especially since market seers are predicting that the PBOC’s yuan devaluation efforts could usher in deflationary demons. Don’t forget that China’s central bank is trying to make Chinese exports more affordable in the international market and since almost all things are made in China, this could put downward pressure on global inflation. Unless Uncle Sam shows that it’s got a pretty decent buffer to withstand these potential declines, the U.S. dollar might be forced to retreat.