A run of strong economic indicators in the United States in recent weeks has left investors in no doubt that the Federal Reserve is on track to raise interest rates for a third time this year at its December policy meeting. Inflation data due on Wednesday is unlikely to shift those expectations much even if the figures were to cast some further doubt that price pressures are still nowhere to be found in the US economy.
As the American economy enjoys its ninth year of expansion and with a labour market considered to be at full employment, there is yet little sign of inflation or wage growth running wild. Despite the benign outlook for inflation, the Fed has increased borrowing costs four times since the end of the financial crisis and is widely expected to raise rates again in December to a target range of 1.25%-1.50%.
With growth gaining further traction this year, Fed policymakers have been keen to gradually remove monetary accommodation. However, a prolonged delay in inflation moving towards the Fed's 2% objective may prompt a rethink of the current stance. The headline CPI rate, which is not targeted by the Fed, has already risen above 2%, but is forecast to moderate from 2.2% to 2.0% in October, while the core rate is expected to remain unchanged at 1.7% for the fifth straight month in October. The Fed's preferred measure of inflation - the core PCE price index - is running much lower at 1.3%.
A bigger-than-expected increase in the CPI rate would reinforce expectations that the Fed will continue to raise rates at the current pace next year and be supportive of further gains for the US dollar. However, a soft reading would question the sustainability of the current rate path and may deter the doves within the Fed from voting in favour of further rate hikes, putting the focus on December's FOMC projections for 2018.
Released alongside the inflation numbers will be the latest retail sales figures. Month-on-month growth in retail sales is expected to be flat in October, though given the 1.6% surge in September, the figure is unlikely to cause any alarm.
Unless there is a large surprise, Wednesday's data is not expected to cause much of a reaction in forex markets, especially as the immediate focus right now is on the US tax plan and its passage through Congress. A big miss is in the data would possibly see the dollar finding support around the 113-yen level, which has acted as the bottom of the range for the pair since late October. Upside surprises meanwhile could see dollar/yen attempting to beat November's 8-month top of 114.72, but first it would have to overcome resistance areas around 113.70 and 114.20.