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US July CPI Preview: Inflation data unlikely to change Fed tapering expectations


MongiIG

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  • Annual CPI inflation is expected to decline slightly in July.
  • Fed is unlikely to renounce hawkish policy shift on single CPI print.
  • EUR/USD could target fresh 2021 lows amid broad-based USD strength.

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Inflation in the United States, as measured by the Consumer Price Index (CPI), is expected to edge lower to 5.3% on a yearly basis in July from the 13-year-high registered at 5.4% in June. The annual Core CPI, which excludes volatile food and energy prices, is forecast to retreat to 4.3% from 4.5%. 

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Following the latest comments from FOMC policymakers and the impressive July jobs report, investors are expecting the US Federal Reserve to start reducing asset purchases before the end of the year. The confirmation of the hawkish tilt in the Fed's policy outlook provided a boost to the greenback and the US Dollar Index climbed beyond 93.00 for the first time in more than two weeks.

The US Bureau of Labor Statistics reported on August 6 that Nonfarm Payrolls (NFP) in the US increased by 943,000 in July, compared to analysts' estimate of 870,000. Moreover, June's print got revised higher to 938,000 from 850,000 and the wage inflation, as presented by Average Hourly Earnings, rose to 4% on a yearly basis from 3.7%.

On August 4, Fed Vice Chair Richard Clarida noted that he can see the Fed announcing tapering later in the year. On a similar note, Dallas Fed President Kaplan said that the Fed should start tapering purchases and do it in a gradual way, Atlanta Fed President Raphael Bostic added that he could see the Fed reducing purchases between October and December. Finally, Richmond Fed President Thomas Barkin noted that the Fed has made substantial further progress toward the taper benchmark.

In the meantime, FOMC Chairman Jerome Powell acknowledged during the monetary policy press conference that it was difficult for them to tell when inflation will move back down. "Inflation has increased notably and will remain elevated in coming months before moderating," Powell said and added that price pressures could be more persistent than expected. 

EUR/USD outlook

Unless the CPI reading is a big negative surprise, the USD is likely to continue to outperform its rivals ahead of the Jackson Hole Symposium that will take place on August 26-28. 

On the downside, the initial support for the EUR/USD pair is located at 1.1700 (psychological level, March 31 low, 2021 low). With a daily close below that level, the pair could target the next static support at 1.1620 ahead of 1.1600 (psychological level).

Resistances, on the other hand, could be seen at 1.1800 (psychological level, 20-day SMA) and 1.1900 (psychological level, 50-day SMA). Only a daily close above the latter could attract buyers and help EUR/USD extend its rebound toward 1.1970, where the 100-day SMA is located.

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By Eren Sengezer, 10 August 2021. FXStreet

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