Today, the markets will learn from the U.S. Bureau of Labor Statistics how consumer prices in the U.S. developed in August. A few months ago, this release was the most important news of the month for FX traders. When the Fed's main concern was to combat the inflation shock, this figure was the most revealing for how the Fed sets the key interest rate and thus the carry-on USD positions, Commerzbank’s Head of FX and Commodity Research Ulrich Leuchtmann notes.
A muted market reaction to data surprises is expected
“The fight against inflation has seemingly been won. In the last three months, core consumer price inflation was a meager 1.6% (annualized) – well below levels that would be compatible with the Fed's target (see figure above). Even if the BLS publication for August were to show a value above the Fed target (for core CPI: more than approx. +0.2% month-on-month or more than +3.2% year-on-year), contrary to analysts' expectations, this would not be cause for renewed inflation fears.”
“Higher than expected US inflation is actually USD-negative news. If the domestic purchasing power of the greenback erodes faster than expected, then per se this indicates an erosion of USD purchasing power on the currency market, i.e. a weaker dollar. Surprisingly high inflation only becomes positive if the Fed expectations change disproportionately, i.e. if the future discounted interest rate advantage of the dollar grows by more than the purchasing power of the dollar falls.”
“Just a few months ago, the USD – fundamentally justified at the time – rose sharply when inflation was surprisingly high and fell sharply when inflation was surprisingly low. The market reaction can at best adjust peu à peu. This argument may support some back-and-forth after data releases and probably a muted market reaction to data surprises. But it does not (yet) support a change in direction.”
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