Inflation reports continue to provide background support to the dollar. Data on the growth of the consumer price index were published in the United States on Tuesday, while we learned the value of the producer price index on Wednesday. But if all the components of Tuesday's release came out in the green zone, then Wednesday's report reflected contradictory dynamics. In general, the situation is in favor of the US currency. Bears on EUR/USD keep the pair in the parity area, not allowing bulls to re-develop corrective growth.
But back to the latest report. It is known that the producer price index can be an early signal of changes in inflationary trends (or their confirmation). The overall index disappointed: on a monthly basis, it turned out to be in the negative area (for the second consecutive month), and on an annual basis it slowed down to 8.7% (downward dynamics is also observed for the second consecutive month). While the base index was in the green zone: both in monthly (+0.4%) and annual (+7.3%) terms.
Despite the slowdown in the growth of the general producer price index, in general, the indicators are at a high – we can say "painfully high" level. The same can be said about the consumer price index, the components of which pleased dollar bulls with their green color.
All this suggests that the greenback's position is still strong. By the way, after Tuesday's release, some experts suggested that the Federal Reserve will decide on a 100-point rate hike next week. According to the CME tool, at the moment the markets estimate a 38 percent probability of a Fed rate hike by 100 basis points at the September meeting.
In my opinion, this is an unlikely scenario: judging by the previous rhetoric of the majority of Fed representatives, the central bank remains committed to the "moderately aggressive" pace of monetary policy tightening. The 75-point step fully corresponds to this pace.
Nevertheless, the significance of the above-mentioned inflation reports cannot be overestimated. First, they "cemented" the 75-point September scenario. The probability of an increase in the rate by 75 basis points is now estimated at more than 90%. Secondly, after the release of the latest releases, the probability of similar actions in November and December increased, that is, at the last two meetings of the Fed this year. Fed Chairman Jerome Powell previously noted that the pace of tightening monetary policy will depend on incoming data, primarily in the field of inflation. The August figures indicate that the Fed has not yet managed to curb inflation, despite all the measures taken earlier. At the same time, sufficiently strong Nonfarm allows the central bank to act more decisively. This may not necessarily be expressed in the form of a 100-point hike: the central bank may resort to 75-point rate hikes both this year and at the beginning of next year. At least the current situation is quite conducive to this.
It is noteworthy that inflation reports were published in the United States during the so-called "silence regime". Within ten days before the meeting, Fed members are required to remain silent in the public plane. They cannot comment on current releases or assess the economic situation as a whole (not to mention the forecasts of the upcoming meeting). In other words, we can only guess how the CPI and PPI growth reports will affect the rhetoric of the Fed's representatives. In my opinion, the tone of the central bank's rhetoric will noticeably tighten, reflecting Powell's position, which he voiced at the economic symposium in Jackson Hole. Let me remind you that at that time he made it clear that the Fed would not look back at possible side effects and would raise the interest rate with the knowledge that this could harm households and businesses. I believe that in one form or another this thesis will be reflected in the text of the accompanying statement. In addition, after the meeting (the results of which will be announced on September 21), the most prominent representatives of the "hawk wing" can really allow a 100-point rate hike if inflation continues to show growth.
Thus, the fundamental picture is again in favor of the dollar. The euro, in turn, is still under pressure from many factors. In particular, we found out that the volume of industrial production in the eurozone in July immediately decreased by 2.3%, with a decline forecast of 1.0%. In annual terms, the indicator collapsed by 2.4%, despite the fact that experts expected a minimal, but still an increase of 0.4%. I think comments are unnecessary here.
Summarizing what has been said, we can repeat only the conclusions of the previous days: longs for the EUR/USD pair are risky, shorts are advisable on the upward corrective pullbacks. The bearish targets remain the same – these are the 0.9950 and 0.9900 marks. It is too early to talk about a decline in the area of the 98th figure, as EUR/USD bears also remain somewhat cautious ahead of the September Fed meeting.