FX.co ★ Inflation disappointed. Fed may consider raising rates by 100 bps

US inflation has put everything in its place, and now everyone is convinced that the song of the dollar has not yet been sung. Even though it was clear. Inflation turned out to be not so flexible and malleable as to back down on the first attempt. The expected slowdown in the indicator did not materialize, and this is another reason for the Federal Reserve to strengthen its hawkish pressure.

Higher-than-forecast inflation figures in the US have intensified speculation that the Fed will have to act aggressively in September to curb the rapid rise in prices. Money markets have put a 100% probability of a 75 basis point increase in the price next week and placed almost a 20% probability of a 100 basis point increase at once.

Wall Street collapsed, the most noticeable drop was in fast-growing stocks, as the prospect of higher interest rates triggered a rise in treasury bond yields.

The dollar immediately jumped by 1.5% against the basket of competitors, offsetting most of the recent decline. That was the first reaction. If traders continue to adhere to this strategy, then this week the dollar will have a chance to update the highs before the main event of September – the Fed meeting.

Meanwhile, a week-long period of silence is coming for the Fed before the announcement of the verdict on the rate. The markets will not receive any signals in the coming days. Thus, they will be left alone with their current estimates, which inflation helped them to make. There are two more important indicators ahead of the US central bank's meeting this week, including the retail sales report. However, they are unlikely to overshadow the inflation figures that have stirred up the markets.

The scheme is broken, which was built by market players for almost a month after the first swallow arrived, indicating a slowdown in inflation. They hoped too much and made hasty conclusions, although the Fed warned that they could get burned. High inflation is for a long time.

The dollar index abruptly changed direction on Tuesday and easily overcame the 109.00 mark. The next barrier on the way up is the high since the beginning of the year in the area of 110.80.

Given the current acceleration and positioning about interest rates in the United States, another test of a 20-year peak in the region of 110.80 cannot be ruled out. In general, the short-term bullish view on the US currency will remain unchanged as long as it trades above the 106.30 level.

What's Wrong With Inflation

The report of the Ministry of Labor on the consumer price index showed that the monthly consumer price indicator unexpectedly increased by 0.1% against the consensus forecast suggesting a 0.1% reduction. The annual rate decreased only to 8.3%, which is less than expected – 8.1%.

Meanwhile, the largest increase in the annual consumer price index was recorded in June. Then inflation jumped to 9.1%, a record level since November 1981.

Prices in August, as noted in the US department, increased, as the decrease in the cost of gasoline was offset by an increase in the cost of rent and food.

Gasoline prices in the United States have fallen from an average record high above $5 per gallon in June. On Tuesday, they averaged $3.707 per gallon.

Overall inflation is slowing as commodity prices decline after surging earlier this year amid easing bottlenecks in global supply chains and shifting spending back to services.

In the coming days, market players will review the latest figures and analyze the current situation, looking at it from different angles. But whatever one may say, record inflation cannot be hidden anywhere. In principle, there is a slowdown, but it is so unstable and insignificant.

Most of all today, market players were scared by the rise of the core index. It grew by 0.6% in a month, and by 6.3% in a year. This suggests that inflation has spread beyond energy and food.

It is important to take into account that inflation followed last week's data showing the stability of the labor market. The number of initial applications for unemployment benefits has reached a 3-month low, and job growth remains stable. On the last day of July, there were two vacancies for every unemployed person.

This supports significant wage growth, contributes to higher prices for services and keeps core inflation at a high level.