US August CPI Weakens
The US Dollar has come under pressure over recent sessions in response to yesterday’s US August CPI report. While expectations were relatively muted, with the market forecasting headline inflation to decrease and core to remain unchanged, both readings fell short of market forecasts. On the headline reading, CPI was seen falling to 0.3% from the prior month’s 0.5% reading, undershooting forecasts for a 0.4% result. Meanwhile, core inflation fell to 0.1% from the prior month’s 0.3%, undershooting expectations for another 0.3% result. Additionally, the data showed that annual inflation slowed to 5.3% from 5.4% a year prior.
Fed Tapering Expectations Diluted Further
The data strikes a damaging blow to USD bulls, effectively squashing the likelihood of any near-term tapering from the Fed. With August employment having cratered and with price pressures having fizzled out, the market now needs to see whether August represents a blip in the recovery or a reversal of the recent trend.
Those arguing against Fed tapering have constantly cites supply bottlenecks and low base effects as the main drivers behind the rise in inflation this year. The Fed itself has warned that the lift in inflation was largely a function of transitory factors and was expected to cool off into the year end.
Looking at the breakdown of the data, the big driver behind the decline was the drop in automobile prices which fell almost 2% on the prior month, along with travel expenses, both of which had played a big part in the increase so far this year. Additionally, airline fares and hotel prices were both seen lower over the month, reflecting the disruption being caused by the Delta variant which is once again hitting demand.
Consumer Inflation Expectations Remain High
Despite the downturn in price pressures, however, consumer inflation expectations remain at their highest level since 2013. Looking ahead, consumers (as per data released this week by the Fed) are forecasting inflation to hit 5.2% over the next year – up 0.3% from the last forecast.
In the near term, the US Dollar is likely to stay pressured as yesterday’s data makes the upcoming FOMC meeting even more of a non-event. Despite the current lull in sentiment, however, most players are still forecasting a tapering announcement in November meaning that medium term USD risks are still pointed higher.
Technical Views
DXY
The sell off in the Dollar Index saw price breaking down below the rising channel from YTD lows to test the 92.51 level which, for now, is holding as support. With indicators turned lower, however, there are risks of further losses should this level break, opening the way for a deeper run towards the 90.98 level next.
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With 10 years of experience as a private trader and professional market analyst under his belt, James has carved out an impressive industry reputation. Able to both dissect and explain the key fundamental developments in the market, he communicates their importance and relevance in a succinct and straight forward manner.