US Inflation Preview: CPI critical for taper, three scenarios for the dollar

  • Economists expect the US Consumer Index to have edged lower in August, causing jitters.
  • Core CPI of 4% yearly or below could hit the dollar hard.
  • If high inflation persists, the greenback could gain even more ground.

It is Team Transitory vs. Inflation Bugs – the raging debate between those seeing price rises as a temporary result of the rapid reopening and those seeing it as out of control has yet to be settled. The answer is critical to the timing of the Federal Reserve's tapering of its bond-buying scheme – and the dollar hinges on the upcoming inflation release.

Consumer Price Index (CPI) figures for August serve as a leading inflation indicator. The Fed is unlikely to announce imminent tapering in its upcoming September decision, as Nonfarm Payrolls badly disappointed with job gains of only 235,000 last month. However, CPI figures will shape the hints that Federal Reserve Chair Jerome Powell releases toward the next encounter. 

The Fed watches Core CPI – prices excluding volatile food and energy – and these are expected to edge off the highs for the second month in a row. After hitting 4.5% YoY in June and 4.3% in July, a drop to 4.2% is forecast for August. That would still be above the bank's 2% target. 

Core CPI, off the highs but still off the chart:

Source: FXStreet

How will markets react? Here are three scenarios:

1) Within expectations – dollar shakes and rises

A Core CPI figure of 4.2% that is expected, 4.3% recorded last time, or also 4.1% or 4.4% can be considered within estimates. In that cases, tensions building toward the event will likely be released, causing choppy and directionless trading. 

However, after the dust settles, there are good chances that the dollar extends its recent gains. Any sign that core prices refuse to come down implies a higher chance of an early tapering announcement. 

2) One for Team Transitory – dollar tumbles

An annualized underlying inflation rate of 4% or lower can already be considered a significant downside surprise. It would serve as a victory for Team Transitory, vindicating Chair Powell's insistence that price rises are temporary.

It would also imply the Fed would refrain from hinting about immediate tapering next week but would leave the door open to doing so in the following encounter. 

In this scenario, the dollar would likely suffer a short squeeze, tumbling down and reversing a significant chunk of September's gains.

3) Inflation is everywhere – greenback gains ground 

A return to 4.5% annual core inflation in August – well after the spring reopening – would point to persistent inflation. In such a scenario, Team Transitory would suffer a blow and doves at the Fed like Powell would second-guess their theories.

The rising chances of beginning tapering before year-end would trigger an upswing in the dollar, extending its gains. Stocks would suffer.


August's Core CPI figure is critical for the and for markets. A read within estimates would keep the dollar bid, a level of 4.5% or more would trigger gains, while 4% or lower could undo recent gains. 

More Central banks exercise the pandemic option and keep markets waiting

Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.

If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.

FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.

The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.

Feed news

How do emotions affect trade?
Follow up our daily analysts guidance

Subscribe Today!    

Latest Forex Analysis

Latest Forex Analysis

Editors’ Picks

EUR/USD jumps to three-week highs near 1.1650 amid falling dollar, yields

EUR/USD is trading close to 1.1650, recovering ground to clinch three-week highs. The pair cheers risk-on mood-led decline in the US dollar. Treasury yields pullback, as poor US industrial data tempers hawkish Fed’s expectations. Focus on ECB and Fedspeak.


GBP/USD advances towards 1.3800 amid risk-on mood, hawkish BOE

GBP/USD is advancing towards 1.3800, reaching the highest levels in five weeks. The greenback is losing ground amid a resurgent appetite for riskier assets. BOE's Bailey hinted at a rate hike to contain inflation. UK PM Johnson vowed to fix Brexit’s N. Ireland Protocol. 


Gold eyes $1,780 amid recent USD weakness

Gold prices lock in some fresh gains above $1,770 amid a recent pullback in the greenback. The US benchmark Treasury yields trade lower at 1.57% with 0.57% losses, which weigh on the greenback.  A lower USD valuation enhances the appeal of the precious metal for the other currencies holders. 

Gold News

Litecoin on the cusp of 26% breakout

Litecoin price is on the penultimate leg of a technical formation that will catalyze a quick bull rally. LTC needs to clear one critical hurdle to kick-start a run-up to levels last seen more than a month ago. Litecoin price has been on a slow but steady uptrend since Oct 13.

Read more

Netflix Stock Price and Forecast: When are NFLX earnings?

Netflix stock falls nearly 1% on Friday ahead of earnings. NFLX releases earnings on Tuesday, October 19, after the close. Netflix stock has been boosted by the success of Squid Game.

Read more