US inflation preview: holding high ground should be enough for the Fed, currencies set to differ in reactions

• The US inflation report is expected to continue showing elevated inflation levels.
• The Fed is watching closely, but only a disaster would prevent a rate hike.
• The greenback is set to react differently to different currencies.

The US publishes its Consumer Price Index (CPI) report on Friday, August 10th, at 12:30 GMT. The mandate of the Federal Reserve is inflation and full employment. During an extended period, employment was increasing nicely, but prices did not rise. 

The puzzling phenomenon fizzled out in recent months as prices began moving up. Headline CPI reached 2.9% YoY, fueled by energy prices. More importantly, Core CPI, prices excluding food and energy, marched to 2.3%. The Fed targets another measure of inflation, the Core PCE which stood at 1.9% in June. The different methodology explains the gap, but the trends are the same. 

Expectations and instant reactions

For July, Core CPI YoY is expected to rise by 2.3% once again. Any deviation in this figure will move the US Dollar. A retreat to 2.2% or 2.1% will weigh on the greenback while a rise to new highs such as 2.4% or 2.5% will send it higher. Deviations of 0.3% are uncommon in this publication. 

In case the figure meets forecasts at 2.3%, the other numbers will come into play. Month over month, Core CPI is expected to advance by 0.2%, also repeating the move from June. In case this indicator also meets early predictions, headline figures may have some impact. 

Headline CPI is projected to expected to rise by 2.9% YoY, repeating the previous figure, and 0.2% MoM after 0.1% beforehand. 

Currencies

Different currency pairs are likely to react differently to different outcomes. Some currency pairs are set to respond in a proportional manner, others are more susceptible to a positive result, and others to a negative one.

• EUR/USD: Should provide a straightforward reaction in direct proportion to the surprise. There is nothing exceptional going on in Europe.
• GBP/USD: More vulnerable to the downside on any small beat. Brexit concerns weigh on the Pound and markets are looking for reasons to sell it.
• USD/JPY: Normally provides a straightforward reaction but some trade-related safe-haven flows weigh on the pair. It would be easier for the pair to fall on a downside surprise in inflation.
• AUD/USD: The Aussie is sensitive to the market mood just before the publication. Rising stocks would help push the Australian Dollar higher on a downside surprise. Falling stocks will exacerbate the situation if the figure beats expectations.
• USD/CAD: Canada releases its all-important jobs report at the same time, so it would be prudent to wait for all the data to come in before considering trading the pair.

Long-term effects

The Federal Reserve is set to raise interest rates in September. Small changes in inflation are unlikely to alter its course. For Fed Chair Jerome Powell and co. to change their minds on the hike, Core CPI needs to fall below 2%, a highly unlikely scenario.

This central bank certainty also implies a relatively short-term reaction, especially in case there is no major surprise.