US inflation preview: FXStreet Surprise Index and Trend Indicators both point down – USD to fall?

• Investors and the Federal Reserve will be tuned to June's all-important inflation figures.
• Fed Chair Powell will speak before and after the release, allowing a thorough response.
• FXStreet's Surprise Index is indicating a downside surprise.
• Recent inflation trends are also pointing to a negative outcome.
• Check out the possible trading signal for the US inflation release here

All eyes are on Federal Reserve Chair Jerome Powell and his highly-anticipated testimony on Wednesday. Markets will be tuned to what the world's most powerful central banker has to say. And what is Powell attuned to? The Fed Chair is "data-dependent" and the data speaks on Thursday – with the Consumer Price Index (CPI) report for June.

Price stability is one of the bank's two mandates. We have already received fresh information from the Fed's other mandate – full employment – which has come out significantly above forecasts with 224,000 jobs gained last month.

Will CPI also smash expectations and add to the dollar's strength? Both FXStreet's Surprise Index and the Trend Indicators have been telling a different story.

Before we dive into these potent tools, it is important to note that Powell will have the chance to respond to the data in his second appearance on Capitol Hill, coming some 90 minutes after the figures are out. The timing of testimonies makes the CPI report even more important. However, it also indicates that markets may wait for the Chair's comments – perhaps in an answer to a question by politicians – before moving.

Annual Core CPI is the most important data point and the economic calendar shows that it is projected to remain at 2.0%. Monthly Core CPI is the second most significant figure and an increase of 0.2% is on the cards. The news is due on Thursday, July 11th, at 12:30 GMT.

Negative Surprises

Let us begin with FXStreet's Surprise Index, which quantifies, in terms of standard deviations of data surprises (actual releases vs. survey median), the extent to which economic indicators exceed or fall short of consensus estimates.  

Looking at the long-term trend for top-tier and second-tier figures, we can see that surprises have been trending lower since early in 2019. Disappointments have been getting worse and a downtrend resistance line can be drawn on the index. Recent figures have been unable to remain stable enough to surpass the line just by refraining from further deteriorating. 

The recent Non-Farm Payrolls report may have been responsible for a short-term stabilization – yet at low levels and reflecting a "dead cat bounce pattern." – even a dead cat bounces when it falls on the floor. All in all, another downside surprise seems more likely than an upside surprise.

Taking a different look at data points from the recent 18 months which also includes third-tier figures, the picture is also bleak.

The chart shows a series of four lower highs – a bearish sign. Moreover, recent lows have also been falling, creating downtrend support. 

All in all, FXStreet's Surprise Index is pointing to a downfall.

Trend Indicators pointing lower

We shall now move out of the charts – which have involved some technical analysis – to recent economic indicators related to inflation.