US: Headline CPI inflation to slip to 1.7% y/y - TDS

Analysts at TDS expect US headline CPI inflation to slip to 1.7% y/y, with prices up 0.1% m/m and are looking for energy prices to drive the deceleration, with declines across the board in fuels, electricity and natural gas.

Key Quotes

“Offsetting is a likely strong increase in food prices, allowing prices to recover further on a y/y basis. We look for another modest 0.1% gain in the core, keeping the core inflation rate stable at 1.7% y/y. While the drag from wireless services prices is likely to fade, negative contributions from vehicle prices should continue. However, risks are skewed toward a rounding to 0.2%, especially given that apparel is due for a rebound after falling in the prior three consecutive months. Markets likely will take a dovish cue on a 0.1% print, while a return to 0.2% prints would help raise conviction over the inflation outlook.”

“Foreign Exchange

Through the data deluge, the focus will likely be on core CPI for FX markets. On balance, we are neutral on the USD but we see some two-way risk for selective currency pairs. In particular, we think USDJPY will be most sensitive. This has traded on the heavy side ever since Yellen noted some inflation uncertainty in her testimony earlier this week which helped pull the pair below short-term trend support established from the June 14 lows following a second rejection near 114.50. A move back towards those highs would require an upside surprise relative to consensus. Even if that is the case, we do not think this will be a renewed uptrend as the market will likely need a series of encouraging inflation prints to reinvigorate the rally. As such, we hold a fade the rally stance in USDJPY at the moment and a disappointment on core CPI would have us looking lower towards supports spotted near 112.50 followed by 111.80/90 (where multiple DMAs converge).”