US CPI Quick Analysis: Dollar buying opportunity? Ugly inflation promises further flight to safety

There is no rest for the wicked inflation – prices are rising almost everywhere, including the rental sector. While headline inflation edged lower to 8.2%, the Core Consumer Price Index (Core CPI) rose by 6.6% YoY and 0.6%, both 0.1% above already elevated estimates. 

The price rises the Federal Reserve cares about are rising, not falling – peak inflation is not even covered by mist; it is beyond the horizon. That cements a fourth consecutive 75 bps rate hike in its November meeting to a range of 3.75-5%. Moreover, it implies a peak rate of 4.8% already in March – above the bank's projections just a few weeks ago. 

The dollar has significantly risen in response to the data, and I argue there is more in store. Why? Expectations of higher rates stress the global financial system, causing investors to flock to the safety of the greenback. 

Moreover, as global trade is primarily invoiced in dollars, prospects of an even higher already depress international trade and cause funds to, once again, rush to the safety of the world's biggest economy – one that is still growing strongly. Inflation is the result of robust growth in output and jobs. 

What would change the picture? I think that only job losses could turn the picture against the dollar – not before. 

The Fed convenes in less than three weeks, and it has all the data it needs. Nevertheless, markets will likely remain volatile, speculating about the next move and the following ones – clinging to every data point in the hope of seeing a pivot. That hope may turn into despair. 

One thing is certain – the Fed is unlikely to stop its Quantitative Tightening plan, thus withdrawing money from markets. This growing scarcity of liquidity comes on top of uncertainty and adds to market action. I recommend lowering trade leverage.