US CPI to slow two tenths to 1.8% in May - TD Securities

"We look for headline CPI to slow two tenths to 1.8% in May — a tenth below consensus — on the back of a mild 0.1% seasonally-adjusted monthly increase," said TD Securities analysts previewing tomorrow's inflation report from the U.S.

Key quotes

"The softer monthly increase is largely the result of the normalization in energy prices, which were a major driver to the upside in recent months. We anticipate food prices to remain largely subdued in May, but flag an upside risk. Recall food prices were flat in April, on an nsa basis, following four consecutive double-digit increases."

"Core inflation, on the other hand, should remain steady at 2.1% y/y, reflecting a firm 0.2% m/m advance. Although we pencil in a softer 0.2% m/m increase in core services, we expect a long-delayed rebound in core goods at 0.2%. We anticipate OER to remain largely steady at 0.3% m/m and for the ex-shelter segment to slow marginally on a monthly basis."

"With the Fed pointing to low inflation (albeit temporary according to some members) as a possible cause — alongside developments in trade — to reconsider the Committee's interest rate outlook, we will be watching CPI data closely. Further to this, the curve is peddling an aggressive easing bias this year. Taken in tandem with the broad USD's correlation to US data surprises (and relative to G9 surprises as well), the USD will be sensitive to data that especially reaffirms this positioning bias in rates."

"The limiting factor we think is that the Fed is in the media blackout period, so we are more cautious in trying to push an aggressive USD move one way or the other ahead of the decision next week — where we think it will be less likely the Fed changes policy. All told, we look for EURUSD 1.1265/80 pivot to be key support on a positive CPI outcome, while 1.1365 (200dma) will be appreciable resistance. We expect this range to remain intact ahead of the Fed."