The Consumer Price Index (CPI) in August decreased to 8.5% from 9.1% in June in annual terms. This is undoubtedly very good news. It gives hope that inflation has finally peaked and the central bank may switch to a less hawkish stance.
More than 62% of analysts are now betting on a 50 rate hike instead of a previously anticipated 75 basis point increase. However, the regulator cooled down euphoria, saying that it needs to see at least one or two similar drops in the indicator to be fully confident that the inflation is under control.
Thus, President of Minneapolis Fed Neel Kashkari called a drop in the CPI index just "pleasant" news. He said the Fed is "far from declaring victory on inflation." President of Chicago Fed Charles Evans also acknowledged that inflation is still "unacceptably" high. President of the San Francisco Fed Mary Daly stressed that consumer prices remain "too high and not near our price stability goal."
Many top analysts also do not share market optimism. They believe that one decline in the consumer price index is not enough to celebrate victory. Besides, a drop in consumer prices in July is largely associated with a sharp decrease in gasoline prices. After excluding gasoline prices, we should look at the Core CPI Index. The situation is strikingly different here. The Core Consumer Price Index also fell to 0.3% from 0.7% on a monthly basis.
However, in annual terms, the indicator did not change and remained at a 6-month low of 5.9% in July. Analysts see several reasons why the Core CPI Index will hardly decline. The main factor is high car prices, which are a significant component of the index. They are unlikely to decrease.
A strong US dollar will boost import prices, resulting in higher consumer prices. In addition, large money injections at the start of the pandemic artificially lowered inflation in the United States. However, the Fed ended its pandemic stimulus programs. It means that US households will have to rely only on their own income.
The US dollar sank considerably following positive CPI data. It fell to a 5-month low, namely below 105. At first, US government bond yields decreased as well. However, US Treasuries managed to recoup losses amid Fed policymakers’ speeches. Apparently, traders took notice of the hawkish statements of Fed officials. So, the US dollar index also rebounded today, winning back a 1% drop in the previous session. In the Asian session, it managed to climb to 104.93 versus its main rivals. However, given the increased risk appetite, it is now trading in the downward channel of 104.88-105.46.
The yen showed a similar dynamic to the greenback as it experienced sharp swings. In the American session, the dollar/yen pair plummeted after the publication of the US CPI report. The yen grew by more than 1.6% against the US currency. The yen is also up amid speculation that US inflation has already picked. However, the US dollar recouped most of its early losses thanks to the Fed’s hawkish rhetoric. In the Asian session, the pair was trading at 132.68. Keep in mind that the correlation between the yen and US Treasury yields is low today due to the celebration of Mountain Day in Japan. So, trading floors in Japan are closed today. During the Asian session, the dollar/yen pair was moving in the bearish channel of 132.43-133.32. The US dollar is expected to be rather volatile as traders are mulling over the next steps of the Fed on monetary policy.
The Australian dollar surged to a new monthly high of 0.7094 following a relative slowdown in US inflation. Commodity currencies are growing amid increased risk appetite and hopes for a soft landing. In addition, China has announced an end to its military drills surrounding Taiwan. This decision eased geopolitical tensions. So, the AUD/USD pair is likely to touch new monthly highs. It has already advanced to 0.7093. It continues to grow, moving from the support level of 0.7063 to the resistance level of 0.7110.