Should Sell US Dollar Following Recent Inflation Report?

Should Sell US Dollar Following Recent Inflation Report?

September 14, 2022 0 By Gabriel Rollins
  • United States inflation surged to 8.3% last month.
  • Though the hot inflation data, factors exist to annul the USD move
  • Fed seems ready for a 75bp hike, but markets have already priced the decision.

Tuesday’s hotter-than-anticipated inflation announcement in the US saw the USD on a massive upside move. Moreover, sticks plummeted, and Wall Street recorded the highest single-day percentage fall within two years.

Inflation remained elevated. August sessions saw consumer prices surging by 0.1% month-on-month, against the predicted -0.1%. Moreover, core consumer prices (excluding energy prices) increased by 0.6% against the anticipated 0.3%.

Such market conditions saw inflation surging to 8.3% year on year, whereas the market anticipated 8.1%. Though the difference appears small, the uptick surprised market players.

Fed swaps reacted to the report with Fed’s funds terminal rate beyond 4.15%at early 2023. Meantime, the dollar soared, and stocks crashed. Meanwhile, contrarian investors interested in the dollar’s other side might fade the move due to:

  • Shelter CPI Remains a Lagging Indicator
  • DXY Couldn’t Surge Past 110

Shelter CPI Remains a Lagging Indicator

Shelter contributed most of yesterday’s upward surprise, with the segment gaining 0.7%. Nevertheless, it remains a lagging pointer as the data allows distortion.

Nonetheless, the Federal will have to hike rates during the upcoming meeting, with a 75 basis points uptick in the table. Some believe a massive rate increase is essential, but that seems unlikely.

Likely, most officials will highlight higher interest rates during next week’s quarterly economic projections. Thus, a 75 basis point increase represents the base case, and markets had priced it in before the inflation data release.

DXY Could Surge Past 110

The DXY (dollar index) shows the United States dollar’s weakness or strength against currencies such as CHF, GBP, and EUR. Recently, it climbed beyond 110, but could not steady above the mark.

Moreover, the daily chart displayed two bearish signals – a bearish divergence with RSI and a climbing wedge setup.

All that calls for caution. Meanwhile, the US rising inflation isn’t a surprise anymore. Rates remain elevated, and officials promise more. A 75bp hike during next week’s conference follows other massive hikes.

Thus, the markets could have priced in tightened financials. Dollar bulls should explore current levels with care.