US dollar marches higher ahead of inflation data
The dollar kicked off the week on a strong footing following five straight days of declines in the S&P 500 and the Dow Jones Industrial Average. The greenback has benefited from safety flows given wobbly equity markets and rising bond yields, and at the time of writing, futures suggest dip buyers are not ready yet to provide the needed boost to stocks.
Reopening challenges from the coronavirus variants remain the biggest factor driving asset classes across the globe, and if hard data continues to show weakness, the dollar will continue to benefit from haven inflows. This week, data from the US will shed more light about the health of the economy with consumer prices, retail sales and consumer sentiment are all under investors’ radar.
The trajectory of inflation remains one of the most debated topics on Wall Street and it will not end when CPI data is released on Tuesday. However, investors and policymakers will at least get some insight before next week’s Federal Reserve monetary policy meeting.
Inflation has been the only key economic metric surprising to the upside over the past few months and last week’s producer price inflation jumped above 10% for the first time in four decades. Economists are predicting a 5.3% year-over-year increase in CPI for August, a slight decline from the 5.4% recorded in July.
The headline number is important, but investors need to see if price increases are widening to more categories. This will make the argument of transitory factors driving prices higher less convincing and possibly lead to a more hawkish tilt within the FOMC. The longer inflation remains elevated, the faster the Fed needs to tighten policy and that’s a topic for the Fed to debate at the 21-22 September meeting.
The current state of the global economy continues to favour a stronger dollar, especially because scaling back bond purchases by the Federal Reserve is likely to provide a boost to long term US Treasury yields. This week, currency traders need to keep a close eye on various economic data and overall sentiment in equity markets.