Week Ahead: Higher-than-expected US inflation could see more USD strength

Inflation.

You’re probably sick of hearing about it, and likelier still to be sick of living with it.

But that doesn’t mean that markets will ignore it.

Inflation remains arguably the single most important piece of economic data for markets in signalling the road ahead for central banks and the global economy.

With all that in mind, the market’s collective focus is set to be primed towards the upcoming release of the US consumer price index (CPI) amid these scheduled economic data releases and events across major economies:

Monday, July 11

• CNH: China June FDI
• JPY: Bank of Japan Governor Haruhiko Kuroda speech
• NOK: Norway June CPI
• GBP: BOE Governor Andrew Bailey appears before UK Treasury Committee
• USD: New York Fed President John Williams speech
• Natural Gas: Nord Stream 1 gas pipeline undergoes maintenance through July 21

Tuesday, July 12

• AUD: Australia July consumer and business confidence
• EUR: Germany July ZEW survey expectations
• GBP: BOE Governor Andrew Bailey speech

Wednesday, July 13

• CNH: China June external trade
• NZD: RBNZ rate decision
• EUR: Eurozone May industrial production, Germany June CPI (final print)
• GBP: UK May GDP, industrial production, external trade
• USD: US June CPI, Fed Beige Book
• CAD: Bank of Canada rate decision
• US crude: EIA weekly oil inventory report

Thursday, July 14

• JPY: Japan May industrial production (final print)
• AUD: Australia June unemployment, July consumer inflation expectations
• USD: US weekly jobless claims
• S&P 500: US earnings season kicks off – JPMorgan, Morgan Stanley

Friday, July 15

• CNH: China Q2 GDP, June industrial production, retail sales
• USD: US June retail sales, industrial production, July consumer sentiment, Atlanta Fed President Raphael Bostic speech
• Wells Fargo, Citigroup Q2 earnings

The median estimate for the June CPI is 8.8%, and if so, would mark the fastest year-on-year rise in consumer prices since the 8.9% print back in December 1981.

Should headline inflation exceed market expectations, that could lead to even more gains for the US dollar.

For recent reference, one only has to look at what transpired immediately following the higher-than-expected May CPI released on June 10th.

That upside inflation surprise placed the equally-weighted USD index en route to a fresh 2022 high, before eventually claiming the 1.20 mark, where it still lingers closeby.

At the time of writing, markets have yet to fully price in another jumbo-sized 75 basis point hike by the Fed at its next policy meeting in the final week of July.

Recall that the Fed triggered a 75bps hike last month – its largest hike since 1994 – with the aim of subduing consumer prices.

Further evidence that US inflation remains stubbornly elevated, despite the Fed already raising rates by 150 basis points so far this year, could mean that the Fed has to remain aggressive in order to maintain its inflation-fighting credibility.

Such a narrative could mean a stronger greenback, especially given that the US economy appears better able to withstand higher interest rates compared to other major economies such as the Eurozone and the UK.

Note these six pairs that make up this USD index, all in equal weights:

• EURUSD
• GBPUSD
• USDCHF
• USDCAD
• AUDUSD
• NZDUSD

Greater divergence in the Fed’s rate hiking plans relative to the ECB/BOE’s (and also widening yield spreads across the Atlantic) could ultimately allow the USD index to keep its head above 1.20, pending how the buck reacts to the US nonfarm payrolls print due in a few hours from now.