USD in the doldrums as inflationary pressures fade away

Even though central banks’ meetings took centre stage yesterday, investors were also keeping an eye on key economic data from the US. The August inflation report was released yesterday and came in slightly below market expectations. Headline inflation eased to 2.7%y/y versus forecast of 2.8% and 2.9% in the previous month. The surprise came from the core measure as inflation excluding food and energy components printed at 2.2%y/y versus 2.4% expected (and previous month read).

The market reaction was quite strong; especially as investors didn’t pay much attention to economic data lately and rather focus on the US-China trade conflict. EUR/USD jumped 0.75% to 1.17, the highest level since August 27, and continued to grind higher on Friday morning. Similarly, the dollar index fell further as it returned to 94.40, down more than 1% on the week.


 

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Another batch of key data is due today. August’s retail sales are expected to have risen 0.4%m/m (versus 0.5% in July), while the core measure, which excludes auto sales, should come in at 0.5%m/m, down from 0.6% in the previous. Finally, industrial production is forecast to have risen 0.3%m/m, compared to 0.1% a month earlier. Overall, we believe that the risk is biased to the downside for the greenback as a downside surprise could force the Fed to take a break in monetary tightening. With the ECB expected to phase out easy money, it could only push EUR/USD to the upside. Nevertheless, given the uncertainty generated by Turkey, the new Italian government and the Brexit negotiations, it may take longer for the single currency to benefit from this major change.

This report has been prepared by AC Markets and is solely been published for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any currency or any other financial instrument. Views expressed in this report may be subject to change without prior notice and may differ or be contrary to opinions expressed by AC Markets personnel at any given time. ACM is under no obligation to update or keep current the information herein, the report should not be regarded by recipients as a substitute for the exercise of their own judgment.