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Will US inflation data extend or reverse the dollar selloff?


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The dollar has weakened in the wake of the ECB meeting, with traders looking at tomorrows US CPI release for guidance on where we go from here

bg_usd_dollar_336562646.jpgSource: Bloomberg
 Joshua Mahony | Senior Market Analyst, London | Publication date: Monday 12 September 2022 

Dollar drifts after historic rise, with US CPI due to extend or reverse the course

Last week saw the ECB raise rates by 75 basis-points, with many expecting another oversized 75bp hike in a bid the reverse inflation and the deterioration of the euro. That is particularly notable, as the likes of the ECB and their peers will recognize that part of the inflation story will come from imported inflation as the dollar surges higher. Nonetheless, while we have seen the likes of EURUSD reverse upwards in the wake of the ECB meeting, tomorrow brings a fresh look at US inflation. Looking at the trajectory of headline inflation in North America, there is a clear divergence from Europe that brings obvious interest for its potential implications on monetary policy if developed further. European sensitivity to Russian energy brings the potential for prolongued and loftier inflationary pressures, drawing greater need for higher rates.

inflation120922.PNG

The breakdown in US inflation shows that much of the movement in CPI comes from fluctuations in energy prices, with last month’s decline largely derived by a sharp decline in energy price growth. The declines seen in WTI crude since then does raise hopes of another weaker headline CPI figure, with markets widely predicting a figure of 8.1% (vs 8.5% in July). Should such a move occur, we could be looking at another bout of near-term weakness for the dollar as markets seek to gauge whether this will result in a more relaxed approach from the Fed.

USInflation120922.PNG

The greenback has been on the back foot since the ECB meeting, with the dollar index falling towards the crucial 107.27 support level. A decline through that level would bring expectations of further downside to come. Of course, the expectations of a weaker inflation figure do bring the potential for a higher-than-expected reading, which could help lift the dollar once again. Thus traders should keep a close eye out for the 107.27 level coming into this release, with a break below that threshold bringing expectations of a decline into trendline and Fibonacci support (105.78-106.69).

DX-Daily-2022_09_12-13h43.pngSource: ProRealTime
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US Inflation at 8.3% in August, Fed Likely to Retain Hawkish Bias

Sep 13, 2022 | DailyFX
Diego Colman, Market Analyst

AUGUST INFLATION KEY POINTS:

  • August U.S. inflation rises 0.1% month-over-month, prompting the annual rate to ease to 8.3%, from 8.5% in July
  • Core CPI advances 0.6% on a seasonally adjusted basis and 6.3% year-over-year, two tenth of a percent above estimates
  • Inflationary forces are not weakening at the desirable pace despite the ongoing economic slowdown, strengthening the case for higher-for-longer interest rates

US Inflation at 8.3% in August, Fed Likely to Retain Hawkish Bias

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