US Inflation to Move Markets

After the Non-Farm Payrolls, last Friday showed the U.S. economy lost over 30k jobs, the focus shifts to the new set of economic data: inflation.

This coming Friday the Consumer Price Index (CPI) will show if the recent increase in the Average Hourly Earnings (AHE) translates into higher inflation. If yes, the dollar will be in demand.

However, a miss on the CPI on Friday will put the eventual Fed rate hike on hold.

US Inflation

Fed Minutes to Confirm the Bank’s Hawkish Statement

On Wednesday, the Federal Reserve of the United States will release the minutes corresponding to the previous meeting. Considering how hawkish the Chairwoman Yellen was, I wouldn’t be surprised to see the same message coming around.

It shouldn’t matter much for the dollar. As always, the minutes lag as they refer to something that happened three weeks ago.

In the last years, it became a habit for the Fed to hike rates in December. It did so on the previous two occasions it had.

Expect this 2017 to bring the same decision. And, it is not by chance that the Fed picks such a month.

End of years flows will be most likely gone by the time the decision comes. The market’s volatility will be subdued too.

As such, the current FOMC Minutes release this week will most likely reinforce the Fed’s hawkishness.

Therefore, the market’s attention will shift to the CPI data on Friday. While the actual CPI month over month is expected to show an increase from 0.4% to 0.6%, the Fed doesn’t look at it.

PPI to Offer a Clue

Instead, the Fed considers the Core CPI data as more relevant for the actual inflation. Just to be clear, the core inflation data doesn’t consider the transportation, food and energy prices. They are too volatile, and the Fed tends to focus on the core numbers.

Therefore, the dollar will jump only if the core data will surprise positively. The forecast, however, shows a 0.2% level, a steady one when compared with the September release.

One day earlier, though, we’ll have an educated guess about what the CPI will print. The inflation on the producer side (PPI) will come out.

Typically, if the PPI rises, it is only a matter of time until the CPI will catch up. As such, traders will open positions based on the PPI created expectations.

Inflation as Part of the Mandate

The NFP data last Friday, while disappointing, wasn’t accompanied by an increase in the unemployment rate. This one dipped.

Many voices put the weak number on the back of the three hurricanes that hit the States. They may be right.

In any case, the jobs data is only one part of the Fed’s mandate. The other one, the inflation-related part, is a much tougher one.

To bring inflation below or close to two percent, the Fed must be flexible enough with the rates. In doing that, it will try to have a balanced approach.

Conclusion

Expect the trading week to be a slow one until Friday. Already today the price action was subdued as the United States banks were on holiday.

The EURUSD pair moved in a minimal range, and other currency pairs followed suit too. Look for this environment to change as we go dipper into October trading, with inflation holding the key for the end of the year flows.