The big September Fed meeting is in front of us and in a bit more than one day we’ll know if the Fed is going to hike or not. The interest rate decision announcement is going to be followed thirty minutes later by a press conference and during that press conference, the Fed’s staff economic projections will be released.
These projections will show the expected path for the US Gross Domestic Product (GDP) as well as for inflation for the years ahead of us. Perhaps even more important, though, Fed member’s dots will be plotted yet again and the path of those dots may surprise to the upside.
It should come as no surprise as last Friday the Consumer Price Index (CPI) beat expectations by a mile. Actually, not really the expectations by a mile, but the previous monthly release of 0.1% was exceeded by 0.2%.
This is important as we’re talking about the Core CPI here, the Fed’s favorite way to measure inflation as this data doesn’t take into account food and energy prices. We can all say for sure now that the US inflation is picking up!
Inflation together with jobs creation is part of the Fed’s mandate and it means the central bank will move on rates when these two will get closer to their respective targets. While the unemployment rate certainly warranties a rate hike, inflation was the big unknown until now.
Not that last Friday’s data is enough for the Fed to say that inflation is a problem! But if you put the CPI data together with the PPI (inflation at the producer side) data released last week as well, then it is clear that we have a rising trend in both indicators and this might be viewed as the beginning of a rising trend.
The big question will be if the Fed will deliver a dovish hike or a hawkish no hike and the US dollar is supposed to move in both cases. I would say it will move more aggressively to the first instance, as even if Mrs. Yellen will try to talk it down at the press conference, the difference between monetary policies of major central banks is so big that it won’t matter.
It may matter for the US and global equity markets, but not for the forex traders.
One thing is sure: the long summer trading consolidation period is about to end, one way or another, and volatility is supposed to reign forex markets once again.