The US dollar remained flat towards the end of Wednesday and ahead of US inflation data on Thursday. The very light economic calendar on Wednesday will see traders waiting for the big event on Thursday as all eyes will focus on the CPI data for July which will be released at 8:30 A.M. Eastern Time/ 12:30 GMT).
Bearish sentiment has returned in the markets as investors have turned cautious ahead of the inflation data. The June US CPI data released in July showed that inflation had cooled down to 3%, below expectations. US headline inflation for July is expected to rebound though, as oil prices increased sharply last month.
July’s inflation data could force Federal Reserve’s (Fed) policymakers to reconsider September’s monetary policy and possibly extend policy tightening as price pressures remain persistent.
Fed’s fight against inflation will continue
The US Federal Reserve’s fight against inflation continues, as inflation remains much higher than the Fed’s target of 2%. Markets expect the Fed to deliver the last rate hike and may soon start cutting rates in the second half of 2023. The US economy added fewer jobs than projected in July, despite pay gains and a decline in the unemployment rate, suggesting that the Federal Reserve may keep interest rates higher for longer. Additional interest rate increases may be required to bring inflation down to the Fed’s 2% target.
What to expect from the inflation data?
The consumer price index in the United States is expected to rise slightly in July to 3.3% on an annual basis, while the core rate is expected to remain at 4.8%. Core inflation has remained persistently high and will be central to the Fed’s discussions when it considers raising interest rates in September.
Goldman Sachs has lower expectations than the general consensus. They expect a 0.15% increase in core CPI for July, which is below the consensus of a 0.2% increase. The bank expects a 0.16% rise in headline CPI, while the consensus is at a 0.2% increase. Goldman anticipates monthly core CPI inflation to remain within the 0.2-0.3% range in the next few months. They predict that core CPI inflation will come in at 3.8% in December 2023 and 3.0% in December 2024. The bank’s outlook suggests that there is a decreasing trend in core CPI inflation over the next couple of years.
Barclays analysts argue that if inflation data comes in line with their expectations — 3.2% headline and 4.8 per cent core, then it will suggest that the Fed will deliver another increase in interest rates in September.