When the government announced tariffs, one of the great fears surrounding them was that inflation would run rampant. People were fearful that companies would push the added costs onto customers, thus protecting their bottom line.
FX traders anxiously awaited July’s inflation numbers, fearing the USD might extend its year-long downtrend.
However, with actual inflation numbers released, tariffs have shown to have a smaller impact than expected. This has invigorated markets, and introduced some optimism for upcoming possible rate cuts, which could encourage investing even further.
The consumer price index (CPI) increased 0.2% for the month and 2.7% in year-on-year data. This is smaller than the Dow Jones estimate of 2.8%.
While a tenth of a percentage point may not sound like it poses a significant difference, it’s important to remember that the US is the largest global economy. As such, even such a slight number difference translates to a notable real-world impact.
Still, it’s important to note that, while this has added some energy to the markets, the full picture may tell a different story. Inflation is and likely will continue to be an issue in the US, especially as tariffs, most of which went into effect on the 7th of August, start showing a more significant impact.
This article explores the full content of the current inflation release, its impact on the forex market, and some projections for what may happen.
How are the numbers looking
When economists include volatile areas such as food and energy, the core CPI increases by 0.3% for the month and 3.1% for the year. Economists generally consider core CPI a better measure when looking at long-term trends.
These actually performed worse than expected, with projections of 0.3% for the month and 3% for the year.
The one-month increase is the biggest since January. The year-on-year inflation is the most significant growth since February. As such, although there’s some room for optimism, it’s clear that inflation numbers are likely to grow as the US starts feeling the impact of tariffs.
A large portion of the increase comes from 0.2% increase in shelter prices. Similarly, used vehicle prices jumped by 0.5%, although new cars and trucks remained flat, with the impact of tariffs yet to be seen. Medical care services, as well as transportation, marked a 0.8% increase.
In non-core inflation numbers, food prices increased by 2.9%, with prices for restaurants and takeout spiking even further with 3.9% growth. Energies, meanwhile, decreased by 1.6%, which about evens out the food prices.
There are some categories where tariffs are already starting to show. Household furnishings and supplies followed up on June’s 1% increase with another 0.7%. Apparel prices showed more modest growth with 0.1%, and commodity prices jumped 0.2%.
It’s also worth noting that the BLS has suffered from budget cuts and political threats. Only recently, the BLS has had to readjust job data for past months, showing much more discouraging numbers.
BLS Commissioner Erika McEntarfer was fired after July’s job figures, following an unsubstantiated claim by Trump that the data was rigged. This brings the truth of the current data into question.
Market Impact: US Inflation impact on USD
Inflation is one of the biggest market movers, with releases often causing significant shifts. This time was no different, as markets moved in anticipation of what may happen.
The most significant thing aren’t the inflation numbers themselves, but a possible upcoming rate cut. The Fed has been in a lasting tug of war with Donald Trump, with the president insisting on the cuts and the institution opting for stillness, putting Fed Chair Jerome Powell under fire.
However, both the S&P 500 and Nasdaq seem quite eager for the possibility of cuts. Both had record closes, with S&P growing 1.13% at 6,445.76, and Nasdaq finishing 21,681.90, with a 1.39% increase. The Dow Jones Industrial Average, similarly, displayed a 1.10% jump.
US inflation in forex market
Most traders here are more interested in forex data than the information for the US market individually. However, despite the expected rate cuts, the inflation data impacts the forex market more directly. As such, the USD has marked losses against many key currencies across the board.
EUR/USD
EUR/USD has risen, with the euro strengthening against the dollar. Prior to the report, the pair was pulsing in the 1.65-1.67 range. However, as soon as the European markets opened after the inflation data hit, the pair reacted shaprly, recording a steep climb.
It has broken through the 1.7 mark, displaying that forex traders aren’t keen on betting on the USD.
GBP/USD
A similar story here. The GBP has recorded gains against the USD, following a rate cut announcement from the BoE, which reduced borrowing costs from 4.25% to 4%.
This streak continues with the US inflation report. The pair was quick to rise as UK markets opened, jumping from just below 1.35 to 1.357. The upward trend is somewhat likely to continue
USD/JPY
The USD did manage some slight gains against the JPY, with this pair dropping from 147.8 to the 147.3 range. This marks a small win for USD bears, but even this may be some short-lived energy.
US Inflation: The future for USD traders
While the inflation report took some wind out of USD traders’ sails, many are banking on rate cuts that will bolster the market. CME’s FedWatch tool is now showing the likelihood of rate cuts at 96%, up from 85% prior to the inflation data release.
This makes September an important month for USD traders, and midmonth is when they will likely need to follow markets very closely.
However, even with a rate cut, the long-term outlook for the USD is uncertain. The market was just hit with poor job data, and the inflationary pressure is undeniable.
Another inflation report will hit before the borrowing rate policy is announced, this time showing the impact that the tariffs had in August. Additionally, another batch of labour data will be posted, with the potential to stagger markets if the data remains negative.
These three reports will have a significant market impact, so traders should stay posted.
Disclaimer: This material is for general informational and educational purposes only and should not be considered investment advice or an investment recommendation. T4Trade is not responsible for any data provided by third parties referenced or hyperlinked in this communication.
