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CPI: Global Price Indicator on Its Way Today

Miguel A. Rodriguez
Miguel A. Rodriguez
12 July 2023

Markets prepare for the publication of the US Consumer Price Index (CPI) today and if the general indicator sees a drop, as expected, investors are hoping that the Federal Reserve (Fed) will consider this in their future interest rate decisions.  

US CPI is expected to drop

Today is the day when the United States' CPI will be released. Although the Fed favours the Personal Consumption Expenditure data, Fed officials have frequently stressed that this is the most widely used price indicator globally.

Whatever the case, it is a very pertinent economic figure that, depending on the released figure, may influence the markets.  

The underlying CPI is still expected to be considerably above 5%, although projections call for a large decline in the overall CPI of up to 3.1%.

Investors hope lower inflation could mean end to rate hikes

Investors are hopeful that a decline in inflation would persuade the Fed to stop raising interest rates soon.  

Although there has been a dramatic decline in price levels, if the predictions come true, they will still be much below the Fed's 2% inflation target, especially   in the underlying CPI, which is the most structural indicator.

Therefore, the Federal Reserve will not find sufficient justification to halt the interest rate hike unless the data surprises with an even higher-than-expected decline.

Fed expected to raise rates this month

After pausing at its June meeting, the futures market anticipates that the Fed will increase rates by another quarter of a percentage point this month. The Fed's upcoming decisions in September and beyond are what are at stake when it comes to this figure and the ones that follow.

The majority of the Fed officials' recent appearances suggest that the hawkish tendency will persist for some time.  

Another factor encouraging the Fed to maintain its stance is the fact that the most recent jobs data is still quite strong and shows no indication of a pay fall.

Forex market reactions to Dollar action

While the 2-year bond has returned to levels below 5%, Treasury rates have dropped from highs in light of today's data.  

The US Dollar has been under pressure to weaken as a result of the falling market interest rates, pushing the EUR/USD pair above the 1.10 region.

Since it is most sensitive to changes in Dollar interest rates, the USD/JPY pair has shown the most obvious signs of reacting to these changes. In the past week, the pair lost more than 400 pip. Expectations regarding a future modification to the Bank of Japan's approach to controlling the interest rate curve also have a role in this situation.

Technically, it descends towards the 138.30 level below the 140.60 region. 

DMO 12.07.2023 graph.png

USD/JPY monthly chart. Sources: Bloomberg, Reuters

Key Takeaways

  • US CPI will be out today
  • The publication is expected to show a drop in general CPI
  • Investors hope that a cooldown in inflation may sway the Fed to end its rate hike
  • Futures market expect Fed to raise rates another quarter of a percentage point this month
  • Latest job data remains robust with no sign of a decline in wages
  • Two-year bond has returned to levels below 5%
  • Slide of US Dollar put pressure on EUR/USD and USD/JPY

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Miguel A. Rodriguez
Miguel A. Rodriguez

Miguel worked for major financial institutions such as Banco Santander, and Banco Central-Hispano. He is a published author of currency trading books.