We view the USD correction as a buy and if we firm after CPI we would expect follow-through buying to the upside and the big up trend to resume.
US CPI Forecast
The forecast is 0.6% month on month in terms of headline inflation against 0.4% for the previous month and in terms of the core, it's expected to increase by 0.5% down from 0.6% for the previous month. In terms of year-on-year the rate is expected at 8.00% down from 8.2% and in terms of core the projected increase is forecast at 6.5% against 6.6% for the prior month.
We have seen inflation beat forecasts in recent months and agree with this view: “We expect both headline (+0.7%) and core (+0.5%) to print uncomfortably high monthly CPI readings, keeping the former at 8.0% YoY, and the latter at 6.6% YoY.” (BMO)
It’s the month-on-month that matters as the Fed is not looking at the annual rate if it comes in at forecast it's well above the 2% the Fed is looking for and they have said it will take several months of significant falls in CPI for them to be happy and maybe make a dovish pivot.
The market hopes for inflation to fall quickly butit won't and we expect a strong number to put a 75 bps rate hike on the table for the Fed in December above current market pricing for 50 bps. Inflation is high and broad-based and with the DXY near support, we view it as a buy on strength.
Big Fundamentals Support USD Strength
The USD has major fundamentals in its favor a hawkish Fed, a robust economy compared to most other major nations and it's also a safe haven against a slowing global economy and geopolitical problems. It offers safety and yield and the big trend is up and we expect more upside into the end of the year.
Despite the USD’s rise this year large speculative funds don’t have a major long position so the USD is not overbought or likely to see a big downside break on speculative long liquidation.
Two charts below the first shows our levels of support and resistance to watch out for. The second shows the big up trend and also how the 50-day moving average has supported the up move with comments from the Market Ear.