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What Does Soft CPI Mean For FOMC, USD?

Published 09/14/2021, 07:45 PM
Updated 07/09/2023, 06:31 AM
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.

Latest comments

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.
very strange( 🔨 hammered) numbers from yesterday .ATH for Aluminium Copper Paper Power circuit boards, NG ...
what are saying? inflation is higher than expected and it's not cooling down
No they are not saying that.
No its not it came in under expectations.
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
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
Tapering slows longer term inflation, then rate increases will demolish inflation.
Taper or No Taper, game is over.
What soft CPI? Annual rate is over 5%. Have you lost your mind?
Thank you! Kay I love your Work? Stay Thinking and writing your Stuff???
Soft cpi? really? I can't understand. Nobody can't agree with you.
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.
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.
Can't disagree with that.
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.
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.
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
Lol @ “inflation is cooling”. Drinking the fed kool aide
Hello guys,can someone please guide me through this journey of trading?
Which country u from malala
So ridiculous… .1% is not sufficient information to extrapolate. Theres a better way to make 500 bucks than writing this dribble.
Hi.please help me understand trading
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.
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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