US Inflation Analysis: Soaring Core CPI smashes Fed pivot narrative, King Dollar back on the throne

Like Ukraine's tactics, so has the the price at the pump diverted attention from everything else – and everything else is rising in price. The Core Consumer Price Index has shocked markets with a leap of 0.6% in August vs. 0.3% expected and 0.3% last month. That dip in July proved to be a one-off, Sliding gasoline prices have only lowered headline annual inflation, but that is not what matters to Wall Street. 

Markets had been pricing a "pivot" from the Federal Reserve – a 75 bps hike in September before materially slowing down, "tapering down" rate hikes. That is out of question now, as prices soar. The fact that headline inflation moderated to 8.3% from 8.5% last month may or may not help President Joe Biden, but markets only care about core CPI and the Fed. 

The dollar soared across the board, with EUR/USD tumbling some 150 pips, GBP/USD nearly 200, while USD/JPY leaped over 250. Stocks went from trending higher to trending lower and gold melted by $30 bucks as 10-year yields march toward 3.50%. 

The slide in the dollar proved to be a correction, but will it gain more ground from here? Inflation serves as a reset to the market's narrative and more gains are on the cards – yet it is unlikely to be a one-way street. Some profit-taking is likely before the trend resumes. 

One of the reasons to expect further advances for the world's reserve currency stems from the Federal Reserve's quiet period. Officials refrain from speaking to the public in the ten days leading to their meetings. The next one is on September 21. Such silence is defeating for markets, which hate uncertainty. 

Nick Timiraos – the Wall Street Journal's reporter with ties at the Fed – is the only one who could break the silence. If he reports that the bank is leaning toward a 100 bps move, the dollar could gain even more ground. Bond markets are reflecting an 84% chance of a 75 bps hike, and only 16% of a 100-bps hike. From here, Timiraos can only push the greenback higher.

Assuming the Fed sticks to a third triple-dose hike of 75 bps – which is aggressive in its own right – the greenback would still remain the leader, with dips only serving as buying opportunities. US Retail Sales and the University of Michigan's inflation expectations data are of interest, but only the Fed decision could compete with inflation figures for market moves of such magnitude. 

King Dollar is alive and kicking.