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Fundamental Forecast for USD:Â Neutral
The big U.S. data point for this past week was Thursday’s release of inflation for the month of August. And while this came-out in a rather encouraging format, with headline printing at 1.9% versus an expectation of 1.8% while core came-in at 1.7% versus the 1.5% estimate, bulls were unable to hold on to the previous week’s gains as sellers took over ahead of a pivotal Federal Reserve meeting next week. This better-than-expected inflation print is the second consecutive month of higher prices for the U.S. economy; and this comes after a troubling turn in the beginning of the year that saw inflation swan-dive from a 2.7% high in February down to a low of 1.6% in June. Normally – a print such as we saw yesterday would bring at least a day’s worth of strength into the Dollar; but the context with which we are currently operating can’t quite be considered normal as a huge FOMC meeting looms on the docket for next week, when the bank may announce the start of Quantitative Tightening.
U.S. Inflation Increases for Second Consecutive Month in August
Chart prepared by James Stanley
Wednesday brings a pivotal rate decision from the Federal Reserve in which the bank is expected to be the first major Central Bank to start Quantitative Tightening. During the Great Financial Collapse and recovery, the Federal Reserve’s Balance Sheet ballooned to $4.5 Trillion. And while this was a highly unusual or an ‘extraordinary’ level of accommodation, buying bonds in the open market and flushing the banks that sold those bonds with cash, it accomplished the Federal Reserve’s goal of quelling the sell-off during the Financial Collapse and keeping markets from plummeting in the immediate period thereafter. But it’s too early to call this mission accomplished as of yet, because now it’s time to put QE in reverse with QT (Quantitative Tightening, or the opposite of QE), and nobody really knows how markets will respond as we’ve never seen anything like it.
