The much-anticipated day is here, with the release of the US CPI report. Expectations are for a drop from 2.9% to 2.6%. However, it’s never easy to predict these numbers, especially when inflation is expected to shift so significantly, as it might today.
One key factor to keep in mind is crude oil, which has seen a substantial drop over the last few weeks, down more than 20% since the July highs. This sharp decline could certainly help ease inflation pressures. As you can see from the chart, there is a strong correlation between crude oil and inflation. If inflation indeed cools down to around 2.6%, or possibly even lower, the Fed is going to cut rates, no doubt, but the question remains: will it be 25 or 50 basis points?
Looking at the dollar versus US yields, the dollar seems to be lagging, but the current drop in US yields shows us what speculators are thinking. This suggests that the Fed will eventually have to follow the market (chart above) and cut rates sooner rather than later, which could lead to bearish pressure on the dollar.
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