US Dollar: Multi-year high in Core CPI revives Fed rate hike expectations

<p>After getting clobbered in the first two weeks of February, last week’s recovery in the US dollar was hardly surprising. What was more surprising though […]</p>

After getting clobbered in the first two weeks of February, last week’s recovery in the US dollar was hardly surprising. What was more surprising though was the fact that it was actually driven by decent US economic data.

Last week, we noted the stronger-than-expected January US Retail Sales report, noting that the report represented, “just the most recent evidence that the US economy is, at worst, continued to muddle through,” and that “it’s hard to square the decent economic data with the sharp declines in investor sentiment.” Today’s consumer price index report represents another solid report in the same vein.

Consumer prices were flat (0.0%) m/m on a headline basis, which was actually a tick better than the -0.1% reading expected, but the more impressive reading by far was the “Core” CPI. Consumer prices excluding volatile food and energy components actually rose 0.3% m/m, driving the year-over-year rate to 2.2%, the highest reading since 2012.

While the Fed prefers to focus on an alternative measure of consumer prices called Core Personal Consumption Expenditures (PCE), the historically close correlation between the two, not to mention the strong gains in average hourly earnings in last month’s jobs report, suggests that price pressures may finally be starting to rise meaningfully in the US. Fed Funds futures traders are only pricing in about a 40% chance of another Fed rate hike at all this year, but if inflation continues to rise, expectations and the dollar itself should rise in sync.

Technical view: Dollar Index

On a technical basis, the US dollar index did bounce back this week, but the move is still viewed as an oversold bounce after the early-February collapse. As of writing on Friday afternoon, the dollar index is trading near the 97.00 level, testing the critical 97.00-50 range that has served as both support and resistance over the last few months.

The secondary indicators are predictably subdued, with both the RSI and the MACD holding in bearish territory, so bulls will need to see those improve before growing confident that dollar recovery is meaningful. On a price basis, a move back above 98.00 would shift the bias back in favor of the bulls for a potential continuation up toward 100.00 next.

2-19-2016 10-03-59 AM

Build your confidence risk free
Join our live webinars for the latest analysis and trading ideas. Register now

StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.