Date: 30 Aug 2018

“While inflation has recently moved up near 2 per cent, we have seen no clear sign of an acceleration above 2 per cent, and there does not seem to be an elevated risk of overheating,” said Federal Reserve Chair Jerome Powell at Jackson Hole last Friday. That comment should arguably be particularly pertinent today with the release (at 1330h UK time) of Personal Consumption Expenditure (PCE) deflator data for July. In June the Fed’s preferred inflation index, the PCE price index excluding food and energy (core PCE), rose by 1.9 per cent year-on-year. The market consensus for today’s print is for a 2.0 per cent year-on-year rise in July, hitting the Fed’s target for inflation. With that in mind, traders might wish to recall that Friday’s currency market response to the Powell quote, cited in the first sentence above. That initial response was to sell the USD, notably versus the euro (EURUSD) on the basis that even if US inflation does hit 2 per cent, as the US central bank apparently sees no present sign of an acceleration in prices beyond that targeted level, the Fed is unlikely to envisage the need for more rate hikes than the markets are currently pricing.  On that basis currency market participants could rationally assume that if 2 per cent inflation was already priced into Fed thinking before Jackson Hole, it will take a lot more than that to move the dial on Fed thinking post-Jackson Hole. It’s possible therefore that the USD might not necessarily benefit too much even if today’s US core PCE hits that 2 per cent level.

by Neal Kimberley, External Currency Analyst.