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On Wednesday (July 13) at 12:30 pm GMT the U.S. will print its July inflation reports.

Will the numbers seal the deal for a 75-basis point hike from the Fed? More importantly, how may the U.S. dollar react?

Here are points to consider if you’re trading the data release:

What the heck is a CPI report?

The consumer price index (CPI) report reflects the monthly change in the prices of goods and services purchased by consumers. The U.S. also publishes a “core” version, which removes volatile items such as food and energy prices.

Traders look at CPI because stabilizing prices is one of the Fed’s main #CentralBankGoals. That means it can change its policies if there are any significant trends that might affect economic growth.

What happened last time?

  • Headline CPI (m/m): 1.0% vs. 0.7 expected, 0.3% in April
  • Core CPI (m/m): 0.6% vs. 0.5% expected, 0.6% in April
  • Headline CPI (y/y): 8.6% vs. 8.3% expected, 8.3% in April
  • Core CPI (y/y): 6.0% vs. 5.9% expected, 6.2% in April

Annualized consumer prices clocked in an 8.6% growth in May, which is higher than the expected 8.3% uptick and marked the fastest increase since December 1981. Annual core inflation slowed down from 6.2% to 6.0% even as prices saw broad-based gains.

The CPI report was already highly anticipated, so the faster-than-expected release shookt the markets. Specifically, traders re-priced their expectations to reflect a more hawkish tightening schedule for the Fed.

USD 15-Minute Forex Charts

USD 15-Minute Forex Charts

USD, which started gaining ground at the start of London session trading, made new intraday highs against its counterparts and sustained its gains until the end of the day.

What are traders expecting this time?

  • Headline CPI (m/m): 1.1% vs. 1.0% previous
  • Core CPI (m/m): 0.5% vs. 0.6% previous
  • Headline CPI (y/y): 8.8% vs. 8.6% previous
  • Core CPI (y/y): steady at 6.0%

Analysts see consumer prices rising at a faster annual rate of 8.8% in June while core CPI could hold its 6.0% growth.

Monthly prices are also seen picking up from 1.0% to 1.1% while the core figure could slow down from 0.6% to 0.5%.

Don’t discount downside surprises though! Leading indicators are hinting that price increases may be slowing down:

Markit’s manufacturing PMI noted that “input cost inflation was the slowest in three months,” and that the drop in demand has “calmed prices for a wide variety of goods.

The price component of ISM’s services PMI also recorded its second consecutive monthly slowdown, while 8.3% of ISM’s manufacturing PMI participants reported lower prices and supported a “continued slow but steady move towards price softening.

How can you trade the event?

Remember that markets currently believe that the Fed would raise its interest rates by 75 basis points in July and work to achieve its 3.40% target by the end of the year.

Upside surprises in the CPI reports would inspire speculations of a 1.00% interest rate increase next week, or a higher 2022 target rate for the Fed.

USD could gain even more ground against its major counterparts ahead of next week’s FOMC decision.

Much lower-than-expected price increases, on the other hand, could start talks of “peak inflation.” This means steady (or lower) interest rate expectations for the Fed and likely risk appetite that could weigh on USD.

Not sure which USD pair to trade? You can check out MarketMilk™ performance ranking of USD pairs for opportunities and take a look at the majors’ average volatility to get clues on your stop loss and profit targets.