US Dollar bulls received yet more good news at the end of last week as Friday’s CPI readings for July came in above expectations at 2.9% on the headline reading, remaining unchanged from June and 2.4% on the core (the measure which strips out food and energy prices). Notably, the headline figure, at 2.9495%, was within a whisker of being rounded up to 3% while core recorded its fastest monthly increase since 2008.
Looking at the data then, within the consumption basket, price growth was well spread with the majority of components recording rising price over the month. Apparel and medical costs were slightly weaker, though this was offset by stronger housing and education costs.
Energy Inflation Rises but Has It Peaked?
Year-over-year, energy inflation continues to rising quickly, fuelled by higher oil prices, though the peak impact of the rise in oil prices is most likely behind us given the fall back in oil prices over the last two months. With oil prices have risen steadily over the latter half of last year, the “base effect” (which is the comparison to energy prices 12 months ago) should now start to weigh on energy inflation which could mean that the July inflation reading will be the peak for the year.
Core Inflation Set for Further Increases
However, even if we do see some pullback, core inflation is likely to continue to strengthen as wages continue to grind higher, keeping upward pressure on costs. Trump’s continued trade war with China could now also fuel higher consumer prices due to the goods now being subject to import tariffs which should feed through to retailers over the remainder of the year.
Consumer Inflation Expectations Steady
A survey of US consumers’ one-year inflation expectations, published by the Fed on Monday, held steady in July a 2.98%, marking a fourth consecutive month of unchanged readings. Meanwhile, the three-year outlook declines to 2.88% from 3% in the prior reading in June. The data essentially shows that the market is onboard with the bank’s projected rate path and believes the Fed will be able to raise rates to control inflation effectively, a view which is backed up by the bond yield curve which shows a similar track of declining in the longer end.
Fed on Track to Raise Rates Further
With inflation rising and momentum in the US economy firm (Q2 growth printed a bumper 4.2%), the Fed seems comfortably on track to raise rates a further two times this year as noted in its recent projections. The Fed now views momentum in the economy as “strong”, up from “solid” at the prior meeting and has signaled its intent to continue pursuing a course of gradual rate increases. The market is currently looking towards September for its next rate increase.
Bullish momentum in the USD Index has seen price finally breaking above the 95.10 level where it has been stalled over recent months which should now provide support if retested from above. To the topside, the key level to watch will be the 100.67 region where we have potential bearish channel resistance as well as structural resistance at the 2015 highs. Ahead of this level, we could see some selling at the 97.66 region which offers minor structural resistance.