The highly-anticipated US Consumer Price Index (CPI) inflation data for August will be published by the Bureau of Labor Statistics (BLS) on Wednesday
The US Dollar has been outperforming its rivals since mid-July, with macroeconomic data releases highlighting the relatively upbeat performance of the US economy and tight labor market conditions. In his last public appearance at the Jackson Hole Symposium on August 25, Federal Reserve reiterated that the Fed is prepared to raise the policy rate further if appropriate.
US CPI inflation data could alter the way markets price the Fed’s rate outlook and significantly influence the USD’s valuation. Investors will also pay close attention to the details of the report to see if there is progress in taming sticky parts of inflation. Heading into the event, the CME Group FedWatch Tool shows that markets are pricing in a 40% probability of the Fed raising the policy rate by 25 basis points before the end of the year.
The monthly CPI and the Core CPI are seen rising 0.6% and 0.2%, respectively. In July and August, Oil prices rose nearly 20%. The impact of rising energy prices on inflation is likely to be reflected in the August CPI increase, hence the 0.6% expectation. Usually, markets pay closer attention to core inflation figures since they strip the price changes in volatile items such as food and energy.
The market positioning suggests that the USD faces a two-way risk depending on inflation readings. A higher-than-forecast increase in the monthly CPI could reaffirm one more Fed rate hike either in November or December and provide a boost to the USD. On the flip side, the USD could weaken on a downside surprise to the CPI prints. In this last scenario, risk flows are likely to flood the markets and trigger a capital outflow out of the USD with the initial reaction.
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