- The US inflation report for July is critical for the Fed and for the US dollar.
- FXStreet's Surprise Index is pointing to a potential disappointment.
- In case of a miss, the US dollar may drop.
The Federal Reserve has cut rates due to trade tensions – which have since flared up – and low inflation. While trading President Donald Trump's tweets may be confusing, the Consumer Price Index (CPI) numbers are straightforward.
The next rate decision of the Federal Reserve depends heavily on price development that excludes volatile items such as energy and food – Core CPI – which has risen by 2.1% in June. The economic calendar is pointing to a repeat of the same level in July.
Trading the dollar on the news is rather straightforward. An acceleration to 2.2% or higher would boost the greenback while a miss of 2% or lower may send it lower.
What are the chances of a surprise to either direction? This is where our proprietary tool comes in.
More chances of a disappointment than a positive surprise
FXStreet Surprise Index quantifies, in terms of standard deviations of data surprises (actual releases vs. survey median), the extent to which economic indicators exceed or fall short of consensus estimates.
Examining data surprises dating back to 2011, we see a long-term deterioration. In recent months, the index has broken below the -150 level and hit a new low of -178. An attempt to recover has failed to recapture -150 and the indicator fell back down – reflecting a dead cat bounce pattern. A break below the previous record low has yet to materialize, but the downside seems more appealing after an unsuccessful recovery attempt.
Taking a closer look at data since early 2018, and the picture remains bleak. While we can see an uptrend support line accompanying the surprise index for a long time, it remains.
More closely, the support line is going in the wrong direction – down. A downside disappointment seems more likely than an upside one. Even if the indicator recovers, downtrend resistance looms above.
Conclusion
The FXStreet Surprise Index shows a higher likelihood of a downside surprise than an upside surprise. While such a disappointment may be minor – perhaps Core CPI will rise by only 2% against 2.1% YoY – the dollar's sensitivity to any deviation in inflation may send it down.
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