US inflation figures out today – Commerzbank

Today, markets will learn from the US Bureau of Labor Statistics how US consumer prices fared in August. A few months ago, this release was the biggest news of the month for FX traders. At a time when the Fed’s main concern was combating the inflationary shock, this figure was the most revealing of how the Fed sets its key interest rate and thus its USD carry positions, notes Ulrich Leuchtmann, head of FX and Commodity Research at Commerzbank.

Weak market reaction to data surprises is expected

“The fight against inflation seems to have been won. Over the past three months, core consumer price inflation has been 1.6% (annualized) – well below levels that would be consistent with the Fed’s target (see figure above). Even if the August BLS release were to show above the Fed’s target (for core CPI: more than about +0.2% month-on-month or more than +3.2% year-on-year), contrary to analysts’ expectations, this would not be a reason for renewed inflation fears.”

“Higher-than-expected US inflation is actually negative news for the USD. If the domestic purchasing power of the dollar is eroding faster than expected, then this in itself indicates an erosion of the purchasing power of the USD in the foreign exchange market, i.e. a weaker dollar. Surprisingly high inflation becomes positive only if the Fed’s expectations change disproportionately, that is, if the dollar’s future discounted interest advantage increases by more than the dollar’s purchasing power decreases.”

“Just a few months ago, the USD – fundamentally justified at the time – rose sharply when inflation was surprisingly high and fell sharply when inflation was surprisingly low. Market reaction can at best adjust peu à peu. This argument may support some back-and-forth after the data release and perhaps a weak market reaction to data surprises. But it does not (yet) support a change in direction.”