After the labor market, it is time for inflation data

After the U.S. labor market data released on Friday, which surprised positively, surpassing the market consensus, investors' attention may turn to the U.S. inflation reading. The labor market and inflation may determine further Fed actions, and thus indirectly influence the behavior of many asset classes.

On Wednesday, August 10 at 2:30 pm (GMT+2), US inflation data for July will be published. According to the market consensus, price dynamics in the US may have slowed its growth due to recent reductions in the cost of gasoline refueling. Economists seem to assume that U.S. prices may have increased by 0.2 percent on a monthly basis, which would be the smallest increase since January 2021. On a year-on-year basis, July was expected to bring inflation to 8.7 percent, compared to 9.1 percent in June, according to market consensus. Core inflation could rise by 0.5 percent m/m and 6.1 percent y/y.

It seems that, among other things, the inflation data may determine the Fed's further actions, and before that, the market's attempt to estimate them. According to the valuation of federal funds rate futures, there could be another 0.75 percentage point rate hike in September. Then the range would be 3.00-3.25 percent, and the probability of such an action is estimated at 68 percent.

From the perspective of financial markets, the US dollar may be approaching the point where it may stop reacting so strongly to the data. Namely, good data from the labor market, an increase in expectations for another interest rate hike, seem to no longer make much of an impression on the US currency. The EUR/USD exchange rate thus continued to stay in consolidation between 1.01-1.03 in the past days. As a result, the market may be waiting for a breakout and determining where, if any, it would like to head next.

It's not only the United States that may draw investors' attention this week, but also the United Kingdom. Following the Bank of England's recent decision and the release of estimates for an economy that may be slipping into recession, the market may be looking at data to confirm this. This week, according to preliminary data, it may turn out that the British economy contracted by 0.2 percent between April and June. It seems that the main reason for the decline in GDP may turn out to be demand-dampening increases: energy prices and taxes.