US Inflation Preview: Rising prices should boost the buck

The US publishes its Consumer Price Index report on Thursday, July 13th, at 12:30 GMT. The Federal Reserve focuses on Core Inflation, making the figure the focal point of the publication. Core CPI was stuck below the desired level of 2% for a long time until the base effects faded and the measure reached 2.1% and then 2.2% back in May.

The increase to 2.2% on Core CPI was accompanied by a rise in the Core PCE to 2%. The Core PCE is the measure that the Fed tracks and its stated goal is reaching 2%. For markets, the CPI report is of higher importance due to its earlier publication time: in the middle of the month rather than at the end of the month.

US Dollar positioning 

The greenback was on the back foot for a few days. This was the result of not-too-great data, such as the mixed jobs report, which disappointed in wage growth. Also, the US currency corrected after it had previously advanced. Last but not least, markets were ready for the trade tariffs that the US imposed on China on Friday.

However, things have changed with the report that the US has readied a new list of duties on Chinese goods, this time worth $200 billion. While China has yet to provide a full response, the world's two largest economies are on a collision course ahead of the imposition of these tariffs in late August.

The worsening mood in markets has not totally changed the picture but did balance things out.

Expectations and potential reactions

The balanced nature of US Dollar trading makes the reaction more straightforward: a beat is definite, and a miss is negative. 

Expectations now stand at another advance to 2.3% YoY on Core CPI. Any annual increase of more than 2.3% would be US Dollar positive as it would increase the chances of a rate hike in September and perhaps raise the expectations for 2019 as well. A hike in September is not a done deal according to bond markets.

If Core CPI misses with a stagnation at 2.2% or a fall to lower ground, the US Dollar may fall amid doubts that could creep in. Wages remained stagnant in June, and perhaps prices followed suit. 

And what can happen if the figure comes out as expected? The other figures will come into play. Month over month, Core CPI is expected to rise by 0.2%, repeating the rise of the previous month. If we get no surprises in the monthly core figure, headline inflation will likely gain attention. Prices that do include energy and food are expected to increase by 0.2% MoM and 2.9% YoY, up from 2.8% beforehand.

All in all, the inflation report is a significant market mover, and this publication will likely be straightforward. See how to trade the event with EUR/USD.