Fresh Round of Inflation Data Hits Markets Later This Week

Fresh Round of Inflation Data Hits Markets Later This Week
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The arrival of the Consumer Price Index (CPI) on Friday will bring a strategic opportunity for traders and the potential for new directions in global forex markets ensuring an eventful close to the week. Binary options traders and global financial markets will be anticipating a market moving opportunity among key forex pairs as the key inflation benchmark for the US takes center stage.

The future glide path of the Dollar and the key consideration of whether the Fed will raise rates are both closely linked to the inflation data. Consequently, traders will use the data to judge the overall direction of markets through the second half of the year.


Softening inflation has been the story as of late

For several months running the data has continued a theme of the benchmark inflation barometer being under expectations and demonstrating a rather tepid and declining trendline. This has lowered expectations for another hike from the Fed this year, and left traders to speculate as to what future growth rates could be in such a low inflation environment. 

Last Month’s Market Moving Release

Turning to foreign exchange markets, during the last release on July 14th the Yen received quite a jolt. Markets saw another lackluster CPI number which provided multiple potential opportunities for binary options traders as USDJPY sunk lower. The price action is shown below in tandem with an Average True Range Indicator

It is reasonable to use last month as a basis and expect a price move of similar magnitude if the number is yet again below expectations.  While a strong print would be constructive for the Dollar across multiple currencies, we would expect the most energy in a move against the Yen, due the the relative weakness in the Yen.

Conversely, a print above expectations might have an outsized effect on the USDJPY pair since it has been several months since we had a CPI number that landed ahead of forecasts.

Guidance on CPI

Our outlook is for an extension of the current trend for inflation data which would mean another anemic release on Friday. An artificial neural netowork predictive model turned to econometric factors and current conditions shows there is an elevated probability of a .13% increase in the inflation benchmark month over month, which would equate to an expectation for a 1.66% change on a year over year basis. Broadly recognized market consensus is 1.8% for the year over year number.

Over the medium to longer term, the neural network model provides guidance for the inflation rate to return to 2% level early to mid-next year.

Outlook for Friday

Our base scenario is for a reading around 1.66% representing a marginal underperformance to expectations but a modest increase over last month. We would expect the impact to be a light decline in US 10 year yields and a resumption of the move lower in the Dollar versus the Yen.

The Yen and US 10 year yields have been closely linked and traders can monitor 10-year Treasury Yields on Friday as an additional indicator of potential price action in the Yen.

However, with such a strong recovery in employment as evidenced recently by record low initial jobless claims and strong nonfarm payroll data, we could see a higher year over year CPI number. While our base expectation is for 1.7%, we could see a reading at the Fed’s goal of 2%. Under such a scenario we would expect a sharp spike in US Government 10 year yields and a correlated up move in the USDJPY pair. 

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