US Inflation Report Sets the Tone for Upcoming FOMC Meeting

Today sees the last major US inflation report ahead of the next FOMC meeting on 20 September. Higher gasoline prices and base effects are expected to push August CPI up to 3.6% YoY, and on a core and month-on-month basis, we also see an upside risk to the 0.2% MoM consensus estimate – clearly not enough to feed a bearish dollar narrative

USD

CPI figures to keep the dollar firm The highlight of today's session will be the August US CPI release. As our US economist James Knightley discusses here, the headline year-on-year rate is expected to rise to 3.6% from 3.2% on base effects and higher gasoline prices. And while the core YoY rate may drop to 4.4% from 4.7%, an above consensus core month-on-month reading – possibly on the back of airfares and medical costs – will hardly support any narrative of the Federal Reserve's work being done. This will probably lay the groundwork for a reasonably hawkish FOMC meeting this time next week, where despite unchanged rates, the Fed will (through its Dot Plots) hold  out the threat of one further hike this year. All of the above should keep the dollar reasonably bid and keep policymakers in the likes of China and Japan busy fighting local currency weakness (more below). We are bearish on the dollar from the fourth quarter of this year, but this bearish narrative requires a few more weeks of patience. We favour DXY edging back to the top of its 104.50-105,00 range today.

 

Chris Turner.