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The weak point in US data has always been inflation. It’s a global phenomenon. Lower than expected price rises are holding the Fed back. For several months, all measures of CPI are lagging behind.

This time was different: prices advanced more than expected, at least in annual terms. Headline Consumer Price Index rose by 1.9% y/y, better than 1.8% expected. More importantly, core CPI held its ground at 1.7% for the fourth month in a row and did not fall back to 1.6%.

This is hardly OK. It implies that the Fed’s preferred measure of inflation, the core PCE Price Index, will stay around 1.4%, still off the highs and too far from the elusive 2% holy grail.

But the dollar is now in a recovery mode. The bar is low for the greenback to rise. The bar for a positive surprise was low: not falling. And the environment is similar:

  • Politics: after weeks of messy politics, just a touch of normality is good enough. The debt ceiling and government shutdown issues were postponed by three months. Kicking down the can is good enough.
  • Hurricane Irma was not a disaster: It was bad for quite a few people, but not a disaster like Harvey, just a few weeks earlier. Good enough for the dollar.
  • North Korea: The rogue nation hasn’t performed a nuclear test nor a missile launch in a few weeks. Excellent.

Can this continue? The next big event on the agenda is the Fed decision. Yellen and co. are expected to announce the beginning of the balance sheet reduction, but a rate hike still remains elusive.

Will they hint about a hike in December? That would keep the dollar bid. However, if they look at absolute terms of inflation, there is no rush. In this case, the dollar could fall.

What do you think?

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