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What Does Soft CPI Mean For FOMC, USD?

By Kathy LienForexSep 14, 2021 07:45PM ET
www.investing.com/analysis/what-does-soft-cpi-mean-for-fomc-usd-200601925
What Does Soft CPI Mean For FOMC, USD?
By Kathy Lien   |  Sep 14, 2021 07:45PM ET
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Inflation is cooling in the U.S. and the evidence sent the greenback tumbling against all of the major currencies. Consumer prices grew 0.3% in the month of August, down from 0.5% in July. Economists anticipated the decline, but the magnitude was larger than expected, especially in core prices. The monthly core inflation rate rose only 0.1%, which drove the year-over-year rate down to 4% from 4.3%. This marked the weakest increase in core prices (which excludes volatile food and energy costs) since February. For the past few months, the Federal Reserve has viewed higher inflation as transitory. While its view has been met with skepticism inside and outside of the central bank, today’s report reinforces Chairman Jerome Powell’s steadily cautious approach. The Fed passed on the opportunity to signal taper in August and now it looks like it could do it again in September.
 
Even before today’s CPI report, there was a lot of skepticism about how clear the Federal Reserve would be about taper at this month’s meeting. The one-two punch of slower job growth and inflation could push policy-makers to punt any taper moves to November. The nose dive in Treasury yields and the sell-off in the U.S. dollar are signs that investors are bracing for the worst. With economists are looking for retail sales to fall for the third time in four months, the U.S. dollar should remain under pressure and extend its slide against the Japanese Yen, Swiss Franc, the euro and the British pound.
 
Inflation reports are due from the U.K. and Canada tomorrow. Unlike the U.S., price pressures in the U.K. remain strong in the manufacturing and service sectors, according to PMIs. Canada, on the other hand, saw price growth slow in the manufacturing sector. Sterling ended the day unchanged against the greenback despite slightly better than expected labor market numbers. The total number of jobs created was more than expected in June, with the unemployment rate dipping slightly. However, with a furlough program in place until the end of the month, it is difficult to tell exactly how well the labor market is doing. 
 
There was a lot of volatility in the Canadian dollar during the New York session. USD/CAD dropped to 1.2600 after the U.S. CPI report, but verticalized shortly after to end the day in positive territory as oil prices and stocks reversed lower. If inflation cools in Canada like we expect, USD/CAD, which has been trading in a tight range, could break to the upside. The U.S. dollar is weak, but USD/CAD is more sensitive to risk flows than the market’s appetite for U.S. dollars.
 
The euro ended the day slightly higher but has for the most part been unable to muster sustainable gains since the European Central Bank monetary policy announcement. The Australian and New Zealand dollars ended the day lower. Although Queensland avoided a fresh lockdown, the COVID-19 situation in the country remains grim. Reserve Bank of Australia Governor Philip Lowe spoke last night, and while he confirmed that the central bank would continue with its plans to taper, he does not see an interest rate hike until 2024. This week’s labor market report should show how badly the lockdown impacted the economy, but Lowe believes that the setback is temporary and will simply delay – not derail – the recovery. 
 
New Zealand consumer confidence numbers are due to be release tonight. With Auckland still in lockdown, sentiment is expected to fall. Like the U.S., price pressures appear to be easing because food inflation slowed from 2.8% to 2.4% in August. The New Zealand dollar is very sensitive to risk appetite, which is one of the primary reasons why NZD did not rally on U.S. dollar weakness.
What Does Soft CPI Mean For FOMC, USD?
 

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What Does Soft CPI Mean For FOMC, USD?

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Comments (17)
Todd Gray
Todd Gray Sep 15, 2021 3:20PM ET
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Grim, as in,... fairytale grim? Covid is not Marburgs, or the bubonic plague. Odds of death are somewhere around .00002 in of a million. Grim. Very Grim. But, that's the narrative.
Ricardo Diogo
Rcd72 Sep 15, 2021 3:01AM ET
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very strange( 🔨 hammered) numbers from yesterday .ATH for Aluminium Copper Paper Power circuit boards, NG ...
حمیدرضا داورزنی
حمیدرضا داورزنی Sep 14, 2021 10:56PM ET
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what are saying? inflation is higher than expected and it's not cooling down
Willem Govers
Willem Govers Sep 14, 2021 10:56PM ET
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No they are not saying that.
EHDDyce FC
EHDDyce FC Sep 14, 2021 10:56PM ET
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No its not it came in under expectations.
MuraliKrishna Brahmandam
MuraliKrishna Brahmandam Sep 14, 2021 10:48PM ET
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So Dr. Bubble is more likely to act sooner in September because the lion might let him walk free if he gets off the lion sooner than later. Dr. Bubble and the Lion - will be a story in children's book on how not to do monkey tricks with the US economy
MuraliKrishna Brahmandam
MuraliKrishna Brahmandam Sep 14, 2021 10:43PM ET
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What Dr. Jerome Bubble said transitory inflation was the inflation due to 2020 low Covid base. But Dr. Bubble is aware of the stimulus lion 🦁 he is riding on. The real inflation is yet to begin when taper starts. Inflation Lion will get him sooner or later
EHDDyce FC
EHDDyce FC Sep 14, 2021 10:43PM ET
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Tapering slows longer term inflation, then rate increases will demolish inflation.
MuraliKrishna Brahmandam
MuraliKrishna Brahmandam Sep 14, 2021 10:38PM ET
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Taper or No Taper, game is over.
Sol Wein
Sol Wein Sep 14, 2021 9:21PM ET
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What soft CPI? Annual rate is over 5%. Have you lost your mind?
Chris Black
ChrisBlackforex Sep 14, 2021 9:17PM ET
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Thank you! Kay I love your Work? Stay Thinking and writing your Stuff???
DONGHUN LEE
DONGHUN LEE Sep 14, 2021 9:06PM ET
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Soft cpi? really? I can't understand. Nobody can't agree with you.
JAMES CUNHA
JAMES CUNHA Sep 14, 2021 8:16PM ET
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I disagree with your statement that "the Fed passed on the opportunity to signal taper in August and now it looks like it could do it again in September."  I believe it is expected for the Fed to reach an agreement with its members as to how it intends to taper its asset purchases in November.  Please see the Wall Street Journal article published last Friday. https://www.wsj.com/articles/fed-officials-prepare-for-november-reduction-in-bond-buying-11631266200?mod=article_inline  Furthermore, the ECB, which is considered dovish of all doves, has already announced that it will scale back its asset purchases. As BlackRock's Chief Investment Officer of Global Income mentioned today, further delaying this key Fed announcement regarding tapering would be "distorting" the economy and throwing off markets. It's time to stop guessing. The markets cannot continue to inflate.
Jermaine .A
Jermaine .A Sep 14, 2021 6:13PM ET
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CPI readings are artificially low because a big chunk of it is calculated with "owners equivalent rent". A measure which uses home owner guesses of market rent instead of actual real rent price increases allows the fed to understate the effects of it's current monetary policy and call inflation transitiory. For anyone looking deeper into the data, you'll know stagflation is already here.
Invest Right
Invest Right Sep 14, 2021 6:13PM ET
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Can't disagree with that.
Ioannis Lazaridis
Ioannis Lazaridis Sep 14, 2021 6:13PM ET
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A mesure which uses home owner guesses of market rent... That's really unbelievable . Gossips as a tool for official data ! Thank you for sharing this valuable information.
Invest Right
Invest Right Sep 14, 2021 6:04PM ET
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Thanks Kathy. Some feedback: 1) you said inflation is cooling but didn't provide any commentary from market makers to support that. I've been hearing contrarian views too that the YoY number is still high and therefore the Fed can still broach the topic at Sep's FOMC. 2) Your pieces always appear as a wall of text on mobile devices with no spaces. Makes it hard to read.
martin waititu
martin waititu Sep 14, 2021 5:59PM ET
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due to cpi fall on the dollar index the fed will not temper with rates And on next week we might see very big move form dxy and high chances of a negative dxy
Brett Miller
Brett Miller Sep 14, 2021 5:37PM ET
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Lol @ “inflation is cooling”. Drinking the fed kool aide
Joseph Malala
Joseph Malala Sep 14, 2021 5:36PM ET
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Hello guys,can someone please guide me through this journey of trading?
CHUNGU CONSOLIDATED
CHUNGU CONSOLIDATED Sep 14, 2021 5:36PM ET
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Which country u from malala
Jordan Knapp
Jordan Knapp Sep 14, 2021 5:36PM ET
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So ridiculous… .1% is not sufficient information to extrapolate. Theres a better way to make 500 bucks than writing this dribble.
Joseph Malala
Joseph Malala Sep 14, 2021 5:36PM ET
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Hi.please help me understand trading
frank zapper
frank zapper Sep 14, 2021 5:36PM ET
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Joseph no 1 here can help u. u have to help yourself, read some books on market mechanics, technical analysis, fundamental analysis. then sim trade till u become profitable. there no guru or ez way out. do you homework.
Tomas Kepo
Tomeo Sep 14, 2021 3:56PM ET
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Thanks for great analysis. Did I get it right, when saying that tonight you are expecting NZD to be even weaker ?
 
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