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11 Sep 2024
US CPI data set to show inflation declining further towards 2% target in August
- The US Consumer Price Index is forecast to rise 2.6% YoY in August, at a softer pace than July’s 2.9% increase.
- Annual core CPI inflation is expected to hold steady at 3.2%.
- The inflation data could alter the odds of a 50 bps Fed rate cut in September and rock the US Dollar.
The Bureau of Labor Statistics (BLS) will publish the highly anticipated Consumer Price Index (CPI) inflation data from the United States (US) for August on Wednesday at 12:30 GMT.
The US Dollar (USD) braces for intense volatility, as any surprises from the US inflation report could significantly impact the market’s pricing of the Federal Reserve (Fed) interest rate cut expectations in September.
What to expect in the next CPI data report?
Inflation in the US, as measured by the CPI, is expected to increase at an annual rate of 2.6% in August, down from the 2.9% rise reported in July. The core CPI inflation, which excludes volatile food and energy prices, is seen to stay unchanged at 3.2% in the same period.
Meanwhile, the CPI and the core CPI are both forecast to rise 0.2% on a monthly basis, matching July’s increase.
Previewing the August inflation report, “we expect core CPI prices to remain largely under control in August, printing a fourth consecutive gain under 0.2% m/m. Services inflation will play a key role owing to cooling shelter prices,” said TD Securities analysts in a weekly report. “Headline inflation likely also stayed subdued with energy prices returning to deflation. Our unrounded core CPI forecast at 0.14% m/m suggests larger risks toward a rounded 0.2% increase.”
Following several soft inflation readings in a row, Federal Reserve policymakers made it clear that they will shift their focus to the labor market amid growing signs of a cooldown. “We have a little more tolerance for an upside surprise on CPI as the longer arc shows inflation coming down,” Chicago Fed President Austan Goolsbee said recently.
Economic Indicator
Consumer Price Index (MoM)
Inflationary or deflationary tendencies are measured by periodically summing the prices of a basket of representative goods and services and presenting the data as The Consumer Price Index (CPI). CPI data is compiled on a monthly basis and released by the US Department of Labor Statistics. The MoM figure compares the prices of goods in the reference month to the previous month.The CPI is a key indicator to measure inflation and changes in purchasing trends. Generally, a high reading is seen as bullish for the US Dollar (USD), while a low reading is seen as bearish.
Read more.Next release: Wed Sep 11, 2024 12:30
Frequency: Monthly
Consensus: 0.2%
Previous: 0.2%
Source: US Bureau of Labor Statistics
The US Federal Reserve has a dual mandate of maintaining price stability and maximum employment. According to such mandate, inflation should be at around 2% YoY and has become the weakest pillar of the central bank’s directive ever since the world suffered a pandemic, which extends to these days. Price pressures keep rising amid supply-chain issues and bottlenecks, with the Consumer Price Index (CPI) hanging at multi-decade highs. The Fed has already taken measures to tame inflation and is expected to maintain an aggressive stance in the foreseeable future.
How could the US Consumer Price Index report affect EUR/USD?
The market anticipation of a 50 basis points Fed rate cut in September will be put to the test when September inflation data is released.
Following the mixed August jobs report, the probability of the Fed lowering the policy rate by 50 bps at the upcoming meeting declined below 30% from nearly 50% earlier in the month, according to the CME Group FedWatch Tool. The US Bureau of Labor Statistics announced on Friday that Nonfarm Payrolls rose 142,000 in August. This reading followed the 89,000 (revised from 114,000) increase recorded in July and fell short of the market forecast of 160,000. On a positive note, the Unemployment Rate edged lower to 4.2% from 4.3% in July and the annual wage inflation, as measured by the change in the Average Hourly Earnings, rose to 3.8% from 3.6%.
The market positioning suggests that it will take a significant miss in the CPI data for investors to reconsider a large rate reduction next week. In case the monthly core CPI comes in at 0% or in negative territory, the immediate reaction could revive expectations for a 50 bps cut and trigger a US Dollar (USD) selloff. On the other hand, an increase of 0.3%, or stronger, could confirm a 25 bps cut and help the USD stay resilient against its rivals. However, the fact that such a rate decision is already strongly priced in shows that the USD doesn’t have a lot of room on the upside.
Eren Sengezer, European Session Lead Analyst at FXStreet, offers a brief technical outlook for EUR/USD and explains: “EUR/USD’s near-term technical picture highlights a lack of buyer interest. The pair stays well below the 20-day Simple Moving Average (SMA) and the Relative Strength Index stays near 50.”
“EUR/USD could face first support at 1.1000, where the Fibonacci 38.2% retracement of the two-month-long uptrend that started in late June is located. Below this level, the 50-day SMA and the Fibonacci 50% retracement form the next support area at 1.0950-1.0930. On the other side, in case the pair clears 1.1070-1.1080 (Fibonacci 23.6% retracement, 20-day SMA) resistance, it could target 1.1200 (end-point of the uptrend) and 1.1275 (July 18, 2023, high) next.”
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.