Will inflation be the indicator that gets the dollar back on track
The dollar is still looking soft and has pretty much ignored or reversed positive moves from recent good data. There may be a train of thought that thinks the overall pace of the US economy is known and accepted, and baked in to the buck, so the data isn't really something to react on, unless it comes out very bad, which it hasn't for a while.
However, inflation may just be one data point that really gets Fed watchers reacting, and the dollar bouncing.
From mid-2016 we had a strong run up in inflation but that strength has tailed off over the last few months.
US CPI & core y/y
We're still up around the Fed's target of 2% and the market is expecting to break that today. While the core is expected to come in around the 2.1-2.2% mark vs 2.1% in Nov, the headline number is expected to rise to 2.1% from 1.7%. That would be a pretty big move/expectation normally but we've seen substantial gains in both Europe and the UK lately, which is why the market is looking that high.
With the market leaning towards such a high number, the dollar reaction will be important. If we hit expectations then we could see a confirmation rally in the dollar but that might not be enough to change the short-term trend. If we beat those numbers, especially on the core, a rally might have longer legs. If we get a match or higher headline but a lower core, then any rally on the headline number might be short lived. If both miss expectations then the buck could be heading south again. A real miss in my book would be CPI at 1.6-1.8% and the core at 1.8-1.9%. The market likely won't punish a miss by a smaller margin.
And remember, we also need to keep an eye on the real average weekly earnings for our wages fix. There's no expectations, and they came in at 0.5% y/y & -0.3% m/m in Nov. If we see the y/y number above 1.0% that will be another good number for USD buyers to grab on to.
In terms of hike expectations, this is one number that will hold the market's attention for longer than five minutes, and that's what we need to factor in when trading it. I suspect we're seeing some of that focus on this data in this rally in USDJPY and Treasury yields.
I've got half an idea to fade any dollar pop on numbers that are better but not massively better, as that won't be enough to get the market steaming into the dollar.
113.80 is a level worth watching but it might be too close to the current price on the release. A look up to the 114.75/85 area might be a better spot but if we're up that high, the chances are we've had a strong number that I'll think twice about fading. The area around 114.20/45 is looking the best candidate for fading a pop on good but not exceptional numbers.
USDJPY H4 chart
There's lots to watch out for, which is why I'll wait to see what the price action is telling me before getting in to any trades.