What impact will the US July CPI have on US stocks and the dollar?

This Thursday, the United States will release the CPI data for July. Market expectations suggest that the year-on-year CPI for July will rise from the previous month's 3% to 3.3%, while the core CPI is projected to increase by 4.8% year-on-year, remaining unchanged from the previous reading. If the data exceeds expectations, it may exert downward pressure on US stocks and benefit the US dollar.

On August 10th, the US will release the CPI data for July. The market generally expects a year-on-year increase in July CPI from 3% in June to 3.3%, with core CPI remaining unchanged at 4.8%.

【Source：MacroMicro】

One key reason for the significant slowdown in June CPI was the base effect. The latest year-on-year data is compared to June 2022 when energy prices surged after the Russia-Ukraine conflict, leading to inflation reaching its highest level in 40 years. Looking ahead, the base effect will diminish, which is a major factor behind the market's expectation of a rebound in July CPI.

Will inflation continue to decline or rise as expected? Analysts have different views on this.

JPMorgan Chase believes that CPI will reach its lowest level since October 2021 due to further deceleration in housing, airfare, and used car prices. On the other hand, analysts supporting an inflationary rise argue that the service inflation rate remains high, and wage growth exceeding expectations will make inflation more prone to rise than fall.

We believe that there is a greater possibility of CPI increasing in July and beyond. The recent significant increase in the yield of the US 10-year Treasury bond, despite the impact of Fitch downgrading the US rating and substantial US debt issuance, also reflects the market's rising long-term inflation expectations. Inflation expectations have a self-fulfilling nature, increasing the likelihood of further inflationary rise in the future.

【Source：MacroMicro】

Due to the Federal Reserve's commitment to achieving a 2% inflation target, an unexpectedly high Consumer Price Index (CPI) would increase the probability of the Fed raising interest rates, thereby boosting the US dollar and negatively impacting US stocks. Conversely, if the CPI is lower than expected, it would reduce the likelihood of the Fed continuing to raise interest rates, thus boosting the stock market and weakening the US dollar.

Looking back at June, when the CPI cooled down more than expected, after the data was released, US stock futures rose, with S&P 500 index futures up 0.55%. The US dollar plunged, dropping by approximately 30 points in a straight downward movement, while gold experienced a short-term increase.

【Table: Mitrade Compilation】

We believe that this CPI data will rebound as expected, with core CPI remaining unchanged. The US dollar index will see a short-term rally, while the S&P 500 index will experience minor fluctuations and a slight decline.

From a technical perspective, the US Dollar Index is trading above the 20-day moving average and the MACD indicator still shows a buy signal. If it manages to break above the key resistance level at 102.8, there is potential for further upside. On the other hand, if the US Dollar Index falls back, the support level to watch is around 101.2.

【Source：TradingView】