Higher-than-expected US inflation could further strengthen the US dollar :: InvestMacro


You’re probably tired of hearing it, and you’re likely still sick of living with it.

But that doesn’t mean the markets will ignore it.

Arguably, inflation remains the most important part of the economic data for the markets, indicating the way ahead for central banks and the global economy.

With all this in mind, the collective focus of the market is set to be directed towards the upcoming release of the US Consumer Price Index (CPI) amid scheduled economic data releases and events across major economies:

Monday 11 July

  • CNH: China June FDI
  • Japanese Yen: Bank of Japan Governor Haruhiko Kuroda’s Speech
  • NOK: Norway June CPI
  • GBP: Andrew Bailey, Governor of the Bank of England, appears before the British Treasury
  • US Dollar: New York Fed President John Williams’ Speech
  • Natural gas: Nord Stream 1 gas pipeline is undergoing maintenance until July 21

Tuesday 12 July

  • Australian Dollar: Consumer and Business Confidence in Australia for July
  • EUR: German ZEW survey forecast for July
  • Sterling: Bank of England Governor Andrew Bailey’s speech

Wednesday 13th July

  • CNH: China’s foreign trade in June
  • NZD: Reserve Bank of New Zealand rate decision
  • Euro: Eurozone Industrial Production for May, CPI for June in Germany (Ultimate Edition)
  • GBP: UK GDP for May, industrial production, foreign trade
  • US dollar: US consumer price index for June, Fed Beige Book
  • CAD: Bank of Canada Interest Rate Decision
  • US Crude: EIA Weekly Oil Inventory Report

Thursday 14 July

  • Japanese Yen: Japanese Industrial Production for May (Ultimate Edition).
  • AUD: Unemployment in Australia for June, Consumer Inflation Forecast for July
  • US Dollar: Weekly Unemployment Claims in the US
  • S&P 500: US earnings season kicks off – JPMorgan and Morgan Stanley

Friday 15 July

  • CNH: China’s Q2 GDP, June industrial production, retail sales
  • US Dollar: US Retail Sales for June, Industrial Production, Consumer Confidence for July, Atlanta Federal Reserve Chairman Rafael Bostic’s speech
  • Wells Fargo, Citigroup Q2 earnings

The median estimate of the June CPI is 8.8%, and if so, it will mark the fastest year-over-year rise in consumer prices since the 8.9% print in December 1981.

If headline inflation exceeds market expectations, it could lead to further gains for the US dollar.

For the last indication, one only has to look at what happened right after the higher-than-expected May CPI released on June 10.

That bullish inflation surprise put the isoweight dollar index on its way to a new high in 2022, before eventually claiming the 1.20 mark, where it is still close.

At the time of writing, markets have yet to fully price another 75 basis point hike by the Fed at its next policy meeting in the last week of July.

Remember, the Fed raised 75 basis points last month – its biggest rise since 1994 – with the aim of lowering consumer prices.

More evidence that US inflation remains stubbornly high, despite the Fed’s 150 basis point rate hike so far this year, could mean the Fed must remain aggressive in order to maintain its anti-inflation credibility.

This narrative could mean a stronger dollar, especially given that the US economy appears to be more resilient to higher interest rates than other major economies such as the Eurozone and the UK.

Note these six pairs that make up this US Dollar Index, all with equal weights:

  • British Pounds / US Dollars

The greater divergence in the Fed’s rate hike plans relative to the ECB/BoE (and also widening cross-Atlantic spreads) may eventually allow the US dollar index to keep its head above 1.20, Waiting for the reaction of dollars to print US non-farm payrolls due in a few hours from now.

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