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Heads up, forex friends! The U.S. will be releasing its CPI report tomorrow at 12:30 pm GMT, so buckle up because there’s a good chance that the Greenback will be getting a volatility infusion.

And if you’re looking to trade that top-tier event, then you better gear up by reading up on today’s Event Preview.

What happened last time?

  • Headline CPI (m/m): +0.2% as expected, same as previous
  • Core CPI (m/m): +0.2% expected vs. +0.1% expected, same as previous
  • Headline CPI (y/y): +2.8% vs. +2.7% expected, +2.5% previous
  • Core CPI (y/y): +2.2% as expected vs. +2.1% previous

The May CPI report revealed that the headline reading for U.S. CPI rose by +0.2% month-on-month, which is a bit modest but is within expectations and also matches the previous month’s rate of increase.

Year-on-year, this translates to a more impressive 2.8% increase, which is the strongest reading since February 2012 and marks the fourth consecutive month of ever stronger annual readings.

As for the core reading, that printed a 0.2% month-on-month increase, a tick faster than the expected 0.1% rise.

The annual core reading, meanwhile, came in at +2.2%, which is within expectations but a tick faster than the +2.1% recorded in April.

Overall, the May CPI report was positive on the surface. However, the headline monthly reading was within expectations. Also, the details of the report showed that many CPI components actually printed weaker increases or even declines.

In fact, the core reading surprised to the upside mainly because of the higher cost of new vehicles (+0.3% vs. -0.5% previous), the surge in medical care costs (+1.3% vs. -0.2% previous), and the flat reading for transportation services (0.0% vs. -0.4% previous), which were able to more than offset the weaker readings for the other non-energy and non-food CPI components.

In other words, the details were not really as upbeat and even hinted at a potential weakness, which is likely why bears eventually came out of the woods to kick the Greenback lower.

Another likely reason for the Greenback’s slide is that market players were using the CPI report to exit their positions since the Greenback was trading roughly sideways at the time, given that the FOMC statement was set for the day after the May CPI report was released.

Overlay of USD Pairs: 15-Minute Forex Chart
Overlay of USD Pairs: 15-Minute Forex Chart

What’s expected this time?

  • Headline CPI (m/m): +0.2% expected, same as previous
  • Core CPI (m/m): +0.2% expected, same as previous
  • Headline CPI (y/y): +2.9% expected vs. +2.8% previous
  • Core CPI (y/y): +2.3% expected vs. +2.2% previous

For the inflation situation in June, the general consensus among market analysts is that both the headline and core CPI readings will print a 0.2% month-on-month increase, matching their respective previous readings.

As for the year-on-year readings, the consensus is that headline CPI will pick up the pace by printing a 2.9% rise (2.8% previous). Likewise, the core reading is expected to accelerate from +2.2% to +2.3%.

So, what do some of the leading indicators have to say?

  • The prices index of ISM’s manufacturing PMI report dropped from 79.5 index points to just 76.8. This means that manufacturing companies are still experiencing elevated input costs, but the increase in June is weaker compared to the increase in May.
  • Markit’s manufacturing PMI report corroborates ISM’s findings since Markit found that “The rate of input cost inflation was the slowest for four months, but remained sharp nonetheless.”
  • Despite the weaker rise in input prices, Markit also found that “Factory gate prices also increased sharply, with the rate of inflation accelerating to the second-fastest since June 2011.”
  • Moving on, the prices index of ISM’s non-manufacturing PMI report also deteriorated, falling from 64.3 index points to just 60.5.
  • Markit’s services PMI report doesn’t agree with ISM since Markit found that “Average cost burdens faced by service providers rose sharply in June. The rate of input price inflation matched that seen in May and was consequently the joint-fastest since September 2013.”
  • Even better, companies in the service sector were passing on their higher costs since Markit found that “average charges rose further in June. The rate of inflation was one of the fastest in the current 28-month sequence of increase.”

What about historical tendencies? Do they offer additional insights?

The monthly headline reading apparently tends to strengthen in June.

Unfortunately, there isn’t really a historical tendency for us to exploit since economists have a mixed record when it comes to forecasting the actual reading. It’s worth noting, however, that economists have been getting it right in recent years (more often than not).

As for the core reading, that used to pick up the pace in June. But as you can see in the table below, the core reading for June has recently been matching the core reading for May.

And like the headline reading, there’s unfortunately no historical tendency for us to exploit. Also, economists tend to get it right for the core reading as well (more often than not).

To sum it all up, the leading indicators are presenting a somewhat mixed picture since Markit and ISM agree that input price inflation slowed in the manufacturing sector but they disagree when it comes to the service sector since Markit found that input price inflation in June matched the the rate of inflation in May, while ISM’s prices index printed a drop, which means that input price inflation deteriorated.

However, Markit found that companies in the service and manufacturing sectors were passing on their higher input costs.

And as noted earlier Markit found that factory gate prices “increased sharply, with the rate of inflation accelerating to the second-fastest since June 2011.”

Average charges from the service sector, meanwhile, “rose further in June.” And “The rate of inflation was one of the fastest in the current 28-month sequence of increase.”

Given the promising anecdotal evidence gathered by Markit, it’s likely that that the June CPI reading may match or even exceed the previous reading, at least with regard to the monthly headline reading.

And while there aren’t really any historical trends for us to exploit this time around, it’s worth pointing out that economists’ guesstimates have (more often than not) been hitting their mark for the headline and core readings in recent years. That doesn’t automatically mean that they’ll get it right again this time around, though.

Anyhow, just remember that the Greenback usually (but not always) has a knee-jerk reaction to the monthly headline reading, with a better-than-expected reading usually cause the Greenback to jump higher, while misses generally result in a quick selloff.