Fundamental Analysis

US Consumer Prices Miss Forecasts; Dollar Down to One-Week Low


US core consumer prices, grew steadily for the fourth month in July, disappointing analysts who anticipated inflation to improve moderately. Following the data, the dollar retreated immediately against a basket of currencies to a one-week low, as the recent evidence on inflation, mirrored by consumer prices as well as by producer prices, indicated the weakness of prices to move toward the 2% Fed's target.

On Thursday, the US Bureau of Labor Statistics published the figures on consumer prices for the month of July. Headline inflation rose to 0.1% month-on-month (seasonally adjusted) after it showed no growth in June, undershooting the forecast of 0.2%. This drove monthly real earnings growth down to 0.2% compared to 0.5% seen in the previous month. Year-on-year, the CPI index increased by 0.1 percentage points to 1.7%, while expectations were for a rise to 1.8%.

The core CPI, which is a closely watched indicator by the Fed, as it excludes price volatility stemming from food and energy sectors and therefore is a better proxy of longer-term inflationary pressures, remained flat at 0.1% month-on-month. This was below 0.2% forecasted. On a yearly basis, the index was in line with expectations at 1.7%.

Looking at the details underpinning the records, gasoline prices continued weighing significantly on the index in July, falling the most among sectors by 2.8% month-on-month, while airline fares which dropped by 2.7% in June, improved by 0.7% in July. The fall in transportation costs softened from the negative 0.7% to a negative 0.1%.

Taking into account disappointing readings on US PPI which experienced the largest drop in 11 months in July, as well as today's softer US CPI, the odds for a third rate hike this year have diminished as inflation doesn't show any sign of approaching the Fed's target of 2%. However, further economic data releases in the next months will give a clearer picture on inflation before Fed policymakers gather to decide on the future rate path.

Turning to the reaction in the forex markets, the dollar index fell to a one-week low of 92.99 from round 93.40. Euro/ dollar gained the most, surging by 0.65% to 1.1834 from 1.1753.The pair was last trading at 1.1785. Dollar/yen dropped below the 109 key level to 108.71 but managed to recover soon after, picking up to 109.16.
XM is a fully regulated next-generation financial services provider of online trading on currency exchange, commodities, equity indices, precious metals and energies, with services to clients from over 196 countries worldwide. Founded in 2009 by market experts with extensive knowledge of the global forex and capital markets and with the aim to ensure fair and reliable trading conditions for every client, XM has reached international recognition by virtue of its unbeatable execution of orders, spreads as low as zero pips on over 50 currency pairs, gold and silver, flexible leverage up to 888:1, and personalized customer engagement to foster clients’ success.
More from the author