US CPI Preview: Miss in core inflation to weigh on US Dollar heavily

It is clear that the US inflation is of the utmost importance. At least from what the Federal Reserve officials have been saying last month or so. Almost every speech of the Fed official underlines the importance of inflation in the US getting back to target.

With the US CPI expected to rise 0.1% m/m, while inflation is expected to decelerate to 2.0% y/y in October, the probability of Fed hiking rates in December could fall sharply dragging the US yield curve lower and deflating the US Dollar, a trend we see in positioning ahead of the report on Wednesday November 15.

There is a structural problem with inflation in the US. Rising employment generates positive growth impact, but the inflation is still lagging behind. According to former Fed Chair Ben Bernanke the level of core personal consumption expenditure price index – Fed's preferred inflation measure – remains 4.5% lower than where it would have been had the Fed been successful in meeting its 2% target since the post-great financial crisis era.

A miss on the downside with core inflation that is expected to rise by 1.7% y/y would be harmful for the US Dollar, as it puts the chances for December rate hike lower. With the probability of a Fed hiking rates in December at 90% at moment, repricing would be painful for the US Dollar. 

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