Date: 26 Sep 2017

There’s an argument that chasing the US dollar (EURUSD, GBPUSD, USDJPY) on hopes of further Fed tightening isn’t a strategy that has recently borne fruit. Nevertheless, traders will likely be paying close attention to Fed Chair Janet Yellen when she speaks in Ohio on Tuesday at a lunch event at the 59th annual meeting of the National Association for Business Economics. According to the Fed’s own website the title of Yellen’s speech is “Inflation, Uncertainty and Monetary Policy.” Whether Yellen provides a lead for markets to act upon remains to be seen, but it is perhaps interesting that the New York Fed chose last Friday, without a fanfare, to release details of its new measure of inflation, the Underlying Inflation Gauge (UIG). Seeking to track underlying inflation, the UIG shows prices in the United States have been moving quite differently than has been suggested by traditional price indicators like CPI. The UIG’s broad measure posted a 2.74 per cent print for August, a level not seen, according to the Fed’s historical data, since November 2007, and a sharp contrast to August’s 1.9 per cent year-on-year CPI increase and the 1.4 per cent gain registered in July for the Fed’s preferred inflation measure, personal consumption expenditures (PCE). The latest PCE data will be released on Friday. It would perhaps be quite easy to dismiss the relevance of the UIG number, especially given it is a new measure that has arguably not yet registered on the market’s collective radar screen. But it could be argued that when the Fed has anyway been looking for explanations why inflation hasn’t been picking up as policymakers might have expected, it’s quite a good moment for such a data series to make an appearance. Yellen’s speech may be worth a look.

Written by Neal Kimberley, External Currency Analyst.