The move higher in the dollar is a bit surprising in the sense that the greenback closed the previous week at its lows. Moreover, as the stock market recovered, with the Dow Jones threatening to break above the 29,000, the pressure on the dollar remained during the Columbus Day holiday too (i.e., Monday).
The reversal, while not big in absolute terms, seems important for the simple reason that the market traded in ranges in the last months. Moving forward towards the U.S. elections, the likelihood is that the ranges will continue, which makes trades prone to fade this move.
September 2020 U.S. Inflation Data
The CPI came out in September as expected. Both headline and core data printed 0.2%, lower than the previous 0.4%, showing a disinflationary trend.
So why did the USD move higher if inflation is still below the Fed’s target and trending to the downside? As always, when trading and interpreting financial data, the devil sits in the details.
First, this is the monthly data. If we add it to the yearly changes, we see that the headline inflation was 1.4% YoY, and, more importantly, the Core CPI was 1.7% unchanged. Out of the two, the second one is the most relevant because it represents the benchmark the Fed uses to measure price stability. Also, it is fairly close to the 2% price stability target the Fed is looking at, albeit the mandate changed lately from a linear 2% to AIT (Average Inflation Targeting) on the 2% level.
In other words, the damage to the big picture was not that big as many would have expected. Considering, for example, the inflationary trends in the Eurozone, we may say that the Fed had more success in generating appropriate inflation levels than the Europeans.
As mentioned earlier, the data is unlikely to change the market’s expectations in the weeks until the U.S. elections. Overall, September data showed muted inflationary pressures with spending on goods likely to weaken even further.
The focus for the markets remains the fiscal package being currently negotiated in Washington, and, for economists, what will the impact be on the price of goods and services?