US inflation gets dollar back to the top

In response to the latest inflation data out of the US, European markets are expected to open negative on Wednesday.

Europe's stocks have received a negative handover from Wall Street and Asia. After the August inflation report came in higher than expected, US stocks fell sharply on Tuesday, hurting investor optimism for cooling prices and a less aggressive Federal Reserve.

A recent report from the Bureau of Labour Statistics shows that US consumer price index (CPI) inflation increased by 0.1% in August, as well as 8.3% annually, contrary to expectations that the headline inflation rate would fall by 0.1% in August. The Core Consumer Price Index, which excludes volatile food and energy prices, rose by 0.6% from July and 6.3% from August 2021.

Further speculation has been generated in the wake of the reading that the US Federal Reserve will continue its aggressive policy of tightening monetary policy in the coming months. Currently, markets are pricing in a high probability that the Fed will raise rates by 75 basis points next week. However, there is also a chance of a full 1% rate increase.

With the pound near its lowest level against the US dollar since 1985, yesterday's inflation number from the US poses further problems for the Bank of England. Added to the GBP problems, the UK's inflation fell in August and was primarily driven by a decline in fuel prices. Nevertheless, as food prices rose in the country, the cost-of-living crisis seems to persist.

Events of the day

According to estimates published by the Office for National Statistics on Wednesday, the consumer price index rose 9.9% over the past year. This figure was slightly behind a consensus forecast of 10.2%, and the figure was also lower than July's 10.1%.

Investors anticipate the US retail sales announcement later in the day, and if the figures are strong, the dollar's recent momentum may be reinforced.

The inflation reports are one of the last pieces of data the Fed will see before its September meeting, where the central bank is expected to raise rates by 0.75 percentage points to combat high inflation. As attention turns to the Fed next week's meeting, and another 75bps rate hike is likely, today's US PPI numbers are unlikely to undercut that narrative, even if we see further sharp declines in the headline numbers as we did in July.