USD Turns Lower as Inflation Numbers Relax FED Tapering Worries
According to the June GFOMC meeting, the USD jumped higher, as improving US economic reports forced the FED to turn hawkish. Inflation, which is one of the main drivers behind central banks, has been surging in the US during 2021. CPI (consumer price index) inflation jumped to 5.4% in June, which made markets think that the FED would start the tapering process for the stimulus programs sooner rather than later. This was also confirmed by Bullard’s comments, which have been a positive factor for the USD.
Today’s report showed that inflation remained more or less unchanged, with the headline CPI standing still at 5.5% while the core CPI came in at 4.3%, which is very high. However, it seems like the market was anticipating another increase, because the USD dipped across the board after this report. Will this turn the USD bearish in the coming weeks? Well, the numbers are hanging around all-time highs, so this might be a knee-jerk reaction to the report, with the USD already starting to reverse, but it’s an important report to keep in mind for USD traders.
US July 2021 CPI Inflation Report
- US July CPI YoY +5.4% +% vs +5.3% expected
- June CPI YoY was +5.4%, highest since 2008
- Core CPI YoY ex. food and energy +4.3% vs +4.3% expected
- June core CPI was +4.5%
- July CPI MoM +0.5% vs +0.5% expected
- June CPI Mom was +0.9%
- July core CPI MoM +0.3% vs +0.9% expected – lowest in 4 months
Wages data:
- Real avg weekly earnings MoM -0.1% vs -0.9% in June (revised to -0.5%)
As mentioned, the markets were fearing higher inflation numbers, as according to the report, the US dollar has slumped across the board. It was down 20 pips on every front in a flash. In the bond market, US Treasury 10s are down to 1.347% from 1.370%.
I think this is combining with the comments by Barkin and Evans, regarding pushing back the taper timeline to Nov/Dec, and to ensure that it will be a slow process rather than the quick taper that Bullard has been talking about. If inflation falls back down to target without the Fed hiking rates, why would they need to hike rates at all?
In terms of details, the index for cars rose another 0.2%, but the rise was much smaller than in recent months and suggests that the big rollover isn’t too far away. Used vehicles rose by 0.2%, after three consecutive months of at least 7.3% m/m. Motor vehicle insurance fell in the month, and so did airfares. Food inflation is set to be a talking point in the next few months. It rose to 3.4% YoY from 2.4% prior, but shelter, which is up by 0.4% m/m, accounted for half of the core inflation, and it is the main area to watch, particularly once eviction moratoriums end in October.
It’s clear that the market is looking through energy inflation, in particular with gasoline prices up by 41.8% YoY, and natural gas up by 19%. If energy prices stabilize here, they will be contributing 0% a year from now (or sooner in the case of gasoline).
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