Morning Brief – CPI rollercoaster

CPI rollercoaster

 

Pointing out the heightened sensitivity of markets to data recently was if anything an understatement. Yesterday, prices fluctuated wildly following the release of inflation data in the United States. By way of an early reminder, similarly salient data is due out in the UK later this week and early next. Inflation data is arguably one of the most important statistics that can impact the value of a currency. That is true in this current market environment because it is interest rate differentials that are the key driver of currency valuations in this time of pervasive inflation concerns. Inflation being the target of interest rate control there demands huge scrutiny over the price level in an economy.

 

The Dollar’s fortune has been changing in line with the evolving median perception of something being labelled ‘peak Fed hawkishness’. This refers to the paradigm in which the Federal Reserve monetary authority has been ahead of market expectations coming to an end. This is where the markets ever more generous pricing of USD would begin to come to an end also as interest rate expectations begin to fall rather than continuing to rise exponentially. The debate surrounding peak hawkishness has largely been driven by the discourse coming from Reserve members. However, this was in lieu of inflation data for markets to form more developed expectations of their own.

 

Yesterday’s data showed CPI inflation coming in at 8.5% year on year for July versus an expected figure of 8.7% and previous figure in June of 9.1%. Core inflation also displayed an unchanged figure versus June despite markets having forecast a 0.2% increase. The usually less salient month on month data was arguably even more surprising with significant decreases in inflation versus previous observations and expectations. Markets digested this data by assuming that if inflation is coming down sooner than expected then interest rates will likely not have to rise as high or as fast as they would have done if inflation was still accelerating. The Dollar closed European trading down around 1.5% across the board.

 

 

 

Discussion and Analysis by Charles Porter

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