Distortion in CPI data expected

The US dollar has reversed gains as investors’ confidence in Trump’s tax reform fell again. After sliding as much as 1.50% since the beginning of the week, the dollar index consolidated slightly above 93 on Friday morning. However the week is far from over, the market is awaiting the release of fresh inflation data. Investors have revised their inflation expectations to the upside in September. Median forecasts for the headline measure inched up to 2.3%y/y, compared to a print of 1.9% in the previous month, in anticipation of side effects from the series of storms that hit the US during the month of September. Core inflation is expected to have risen but in to a smaller extend as investors anticipate it will print at 1.8%, up from 1.7% in August.

After contracting 0.2%m/m in August, retail sales are expected to have picked up in September with median forecast standing at 1.7%m/m. Retail sales excluding auto and gas should also recover with markets anticipating a pick-up of 0.4%m/m. Similarly, the impact of Hurricane Harvey will significantly impact the data. The challenge is to filter out its effects, an almost impossible task given the effects result from a broad range of factors as it distorted the demand for various goods and services and also impacted the oil production along the Gulf Coast.

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Since even the core measure is anticipated to be biased, the investors will take the report with a grain of salt. The key USD driver at the moment will remain the upcoming rate hike, which will probably take place in December, and Trump tax reform. Neither is a done deal and by far. Against such a back, further dollar weakness has to be seriously considered. However in the medium-term, we remain dollar positive.