Unfulfilled expectations? – Commerzbank
After last week's focus on the state of the US labor market, this week inflation is back on the center stage. The US Dollar (USD) already showed some weakness yesterday when the Producer Price Index (PPI) was released, coming in slightly below analysts' expectations. This was partly due to the fact that some components of the PPI are directly included in the calculation of the PCE deflator, which is the Fed's preferred measure of inflation. But the lower-than-expected PPI probably also fueled hopes that today's consumer price data could come in lower than expected, Commerzbank’s FX strategist Volkmar Baur notes.
Risk is more in the direction of a stronger USD
“When this happened last month, it triggered significant market movements. On July 10, the day before the last CPI release, EUR/USD stood at 1.08. At the same time, the two-year Treasury yield was more than 40 basis points higher, and the market was expecting two 25-basis-point rate cuts from the Fed by the end of the year, not four.”
“The risk is probably more in the direction of a stronger USD. The Fed will not consider cutting rates more quickly and aggressively just because inflation is moving faster towards 2%. The current annual rate of around 3% is still too high, even if the monthly rates have been low recently. But, should inflation come in higher than expected, contrary to today's hopes, this would make a 50 basis point move in September rather unlikely.”
“Our economists have recently reiterated that they do not expect a recession in the U.S. in the near term. In that case, I think it is very unlikely that the Fed will move by 50 basis points at one of the three remaining Fed meetings, which is what the market is currently pricing in. And in all likelihood, this pricing out will not be gradual, but tied to a data point. It may not happen today, but it could very well at some point over the next few weeks.”
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