USD firm ahead of US August CPI release – BBH

The US Dollar (USD) is trading firmer across majors as markets await the August CPI report, a key test for the Fed’s policy outlook. With headline inflation expected to tick higher and core steady, attention will center on 'super core' services for signs of sticky price pressures, BBH FX analysts report.

Headline CPI seen rising to 2.9% y/y, core steady at 3.1%

"USD is firmer against all major currencies ahead of the US August CPI data (1:30pm London, 8:30am New York). Headline CPI is seen at 2.9% y/y vs. 2.7% in July and core is expected at 3.1% y/y vs. 3.1% in July. Watch-out for super core services (less housing), a good indicator of underlying inflation trends. In July, this measure rose 0.2pts to a five-month high at 3.2% y/y and signaled that progress towards the Fed’s 2% inflation goal is stalling."

"The unexpected softness in the US August PPI, driven by trade services, could translate into a weak CPI print. Trade services PPI (measure changes in margins received by wholesalers and retailers) dropped to a nine-month low at 2.9% y/y vs. 5.9% in July, suggesting business are absorbing costs rather than passing them on to consumers."

"Bottom line: softer CPI inflation will lift Fed funds rate cut bets against USD. In contrast, stronger CPI inflation will raise risk the US economy enters a period of stagflation and can also weigh on USD."