Summary:

• US CPI M/M rises to 0.4% as expected
• Core reading drops lower to 0.1% M/M
• USD dips lower ahead of FOMC this evening (7PM GMT)

There has been a slight disappointment in the latest US inflation data which will be seen to offset yesterday’s PPI beat and will likely also raise questions for Fed chair Janet Yellen this evening. The CPI M/M reading did rise to 0.4% but this was inline with forecasts and the core reading unexpectedly dropped falling to 0.1% against expectations for another 0.2% print. 

 The core CPI reading unexpectedly fell to 1.7% Y/Y. Source: Bloomberg

In Y/Y terms the headline CPI came in at 2.2% as expected but the core also missed forecasts for a 1.8% rise, with a print of 1.7%. Given the Fed have an inflation target of 2% the headline reading does exceed this but the core reading, which excludes food and energy, doesn’t. Given the rise seen in Oil benchmarks lately it is not too surprising that there’s a notable gap between the headline and the core measure. 

 The CPI Y/Y is higher than the preferred Fed measure of the PCE. Source: XTB Macrobond

Even though the reading is higher in Y/Y terms than the Fed’s target the core missing forecasts has weighed on the US dollar.

 The USDJPY has dropped around 35 pips since the release with the pair falling to its lowest level of the week. Source: xStation

Longer term the market could be nicely poised ahead of the FOMC with today’s data unlikely to have a lasting reaction in the market as the CPI pales in significance compared to what happens this evening. The latest dip to around the 113 handle has seen the price retest the 8 period EMA on D1. With the 8 period above the 21 period the market remains in an uptrend according to these but the weekly high of 113.75 could represent some resistance. A break above there could occur on a hawkish FOMC this evening and if the market can take out the prior swing level around 114.35 then a sustained rally may happen. 

Alternatively a drop below the 21 EMA (currently at 112.80) would threaten the uptrend and may lead to a decline towards the 111 handle. The reaction to the FOMC later could well prove decisive in determining the next move for this market.  

 USDJPY remains in a short term uptrend but needs to break above the prior swing level of 114.35 for a sustained rally to occur. Source: xStation