In about one and a half hours, the US CPI figures for August will be released. Headline CPI (YoY) is expected to be slightly higher at 3.6% (previous 3.2%), while Core CPI (YoY) is expected to be slightly lower at 4.3% (previous 4.7%).1 Surprises up or down should have a significant impact on the dollar, which is still hovering around the 104.70 level (dollar index = DXY). Surprisingly higher inflation figures put pressure on bonds and lead to rising yields. This is generally seen as currency bullish. In the other case, surprisingly lower inflation figures lead to bond buying, which results in falling yields. The latter is generally seen as currency bearish.
Of course, the textbook transmission mechanism outlined above does not always lead to the textbook result. In this respect, I am sure that a higher CPI print should support the dollar in the short term. However, if US inflation does not cool down but actually rises again, the development of the dollar could be assessed differently in the medium term. The yield on two-year Treasury bonds suggests that the market does not expect inflation to cool in the short term. While a double top in yields cannot be ruled out, upward pressure remains strong. If yields continue to rise after the inflation figures this afternoon, one should monitor dollar longs in any case tight. I would not necessarily interpret another US bond sell off as dollar bullish.
U.S. 2 Year Treasury Note (5.04%)2
Technically, the DXY still has some room to go up to the annual high at 105.88 (08mar). Together with the January high at 105.62 the target zone for longs is well defined. Below the 104.00 mark, however, the long scenario should be over for now.
Good luck,
Sebbo
Source: FXStreet.com
Source: MarketWatch.com