August 11 2021
Could the US CPI for July disappoint the dollar ultra bulls?
The market is thinking that stars are starting to align for a higher US dollar. It seems just a matter of time before the Federal Reserve announces the tapering of its asset purchase program.
The USD got a green light from the NFP last Friday. So all we need now is a 5.3% plus inflation number to nail on a policy change announcement at the Jackson Hole symposium, followed by details at the September FOMC meeting. All of which is US Dollar bullish.
However, what if the July CPI disappoints? Don’t forget the FOMC are expecting a drop in inflation, as it’s just transitory, right! The market could get a little nervous if inflation starts to drop quickly, will the FOMC wait to announce tapering until a later date?
Could the FOMC be extra cautious due to the surge in covid delta cases in the US? The level of vaccination take-up has prevented authorities from locking down businesses. In doing so, it allows economic activity to recover. But that could change as nothing is certain, in the fight against covid.
I think that the impact from tonights US CPI is not going to be that great. A headline number greater than June’s 5.4% would cause a surprise and push the Dollar higher. However, the market is looking for July’s number to be a little lower. If we see a big miss to the downside, we will see some dollar profit-taking. A dollar correction would provide a welcome opportunity to buy some cheaper US Dollars. If everyone is looking to buy dollars, any correction may not last long.
The FOMC narrative that inflation is just a temporary issue is looking a bit tired. Although, the start of tapering is likely to be sooner rather than later. Tapering bond purchases isn’t going to pull back inflation. The consequences will be that the Fed will have to move interest rates higher, sooner, and more aggressively than they would have liked.
The result of the FOMC’s complacent attitude to inflation, could eventually cause considerable disruption to markets across the board.