How Will US Inflation Data Affect the Dollar Exchange Rate? (There is a chance of renewed USD/JPY decline and AUD/USD growth)

[Ben Graham]

The dollar has stabilized ahead of the release of important US inflation data, starting today with the producer price inflation (PPI) report, and to be followed tomorrow by consumer inflation figures (CPI). How might these affect the dollar and the financial markets overall?

Recall that the market already has well-founded expectations that the Federal Reserve will cut interest rates in response to the extremely challenging situation in the labor market. It is assumed that the key rate will be cut by 0.25% as a matter of course, but there remains a significant probability—currently at 8%—of a 0.50% cut.

For the most part, a 0.25% cut is already priced into the value of US and other assets and is already reflected in the dollar's value on the Forex market. Investors are now turning their attention to the inflation data and the likely regulatory response. In this case, it's almost certain that if both the producer and consumer inflation reports match the consensus forecast, a 0.25% rate cut can be expected. At the same time, if the numbers come in lower, this could be grounds for a 0.50% cut.

Of course, in both scenarios, the market will respond with increased demand for riskier assets and dollar selling. In particular, if the consumer inflation report unexpectedly shows—even a slight—decline, this will be a strong reason for deeper dollar selling amid strong demand for stocks, gold, and cryptocurrencies. Such a development could justify an immediate half-percentage-point rate cut, which the market would reflect by a more significant move.

So far, in the morning session, US stock index futures are trading in the "green," except for the industrial DOW, which is slipping symbolically by 0.05%.

So, the catalyst for global market changes could be today's producer inflation data, which, according to consensus forecasts, should show a decrease in both annual and monthly figures, to a core value from 3.7% to 3.5%, and for the overall monthly figure, from 0.9% to 0.3%. As for tomorrow's consumer inflation numbers, these are expected to show, on the contrary, an increase in both monthly and year-on-year values—from 0.2% to 0.3% and from 2.7% to 2.9%, respectively.

In conclusion, I assess the overall market outlook as moderately positive for risk assets and negative for the dollar.

Day's Forecast:

USD/JPY

The pair continues to move sideways, awaiting the Fed's pivotal monetary policy decision, driven by US inflation data releases. Its decline is likely to prompt selling the pair, with a target drop to 146.30. A suitable level for selling is at 147.25.

AUD/USD

The pair is in a short-term uptrend, awaiting the outcome of the Fed's monetary policy meeting against the backdrop of US inflation data. A breakout above 0.6625 could trigger strong growth toward 0.6715. A suitable buy level is 0.6630.

The material has been provided by InstaForex Company - www.instaforex.com