So CPI came out just now. Prices went up 3%, which is a decline from the last release. So it sounds good.
But what does that mean for the USD?
Is it good, meaning the dollar goes up, because inflation is moving in the right direction, which helps consumers, and might mean no more interest rate hike?
Is it good, meaning the dollar goes up, because inflation is still here, and we DO get a rate hike?
Is it bad of the dollar because with inflation moving down, we DON’T get a rate hike?
Central banks are mandated by their respective govts to “keep inflation under control”.
Traditionally they achieve this goal by fighting higher inflation with raising int rates - the thinking is that higher rates deter spending by both business and consumer and diminished spending decreases demand - thus causing downward pressure on prices.
If I have a store full of stock and fewer ppl coming in then I will look at lowering prices with a sale.
Doesn’t matter whether we agree with this thinking - it’s how the market thinks that counts.
Anyways, the thinking therefore is that lower inflation numbers will encourage the Fed to slacken up on their rate rising expedition.
Investors look for return (profit) and interest is one way of getting that - less interest rate rises means less return, means less buying USD denominated instruments - means less demand for USD - means USD selling (in the short term).
Also - check US stocks - the opposite effect - there are 2 large costs on most business p&l - wages and interest - so likelihood of lower rates means likelihood of better profits.
We are here to learn from each other - your posts are as valuable as mine - so thank you.
For guys learning about risk and the market today was a good learning day.
The market lives in the now - it anticipates what is up ahead - not next month or indeed next week - but in the next cpl of days - that’s how hft/bots are programmed.
It’s a good thing maybe to view the wkly - but that’s in the distant past - the bots vie to be ahead of the game and they seldom look that far back.
The funny thing about today’s market - it reacts to past times analysis such as likely rate rises up ahead, yet ignores things such as Govt cost of borrowing, but that’s in the future.
Inflation and all it ramifications are now what the bots are programmed on - UK wages growth this week on the up - hence likelihood of increase of prices to reflect - thus up goes GBP - the bots are far from intelligent but are def predictable.
@Peterma…Hello there.I have been trying to message you, but for some reason, your messaging inbox doesn’t work. Is there any other way I can reach you?
Dollar up because inflation is slowing? It could mean this. Lower inflation might make the Federal Reserve less likely to hike up interest rates, which can be good for consumers and could strengthen the USD.
Dollar up because of inflation? Maybe. If inflation stays, the Fed might increase rates to cool down the economy, which typically boosts the USD.
Dollar down because of slower inflation? There’s a chance. If the Fed doesn’t hike rates because of slowed inflation, the dollar might soften a bit.
Doesn’t matter? Eh, not really. These economic indicators do matter and can impact the market, but they’re just one piece of the puzzle. We need to consider a range of other factors too.
One thing for sure, the CNN and Fox news schmexperts will always tell you AFTER the event why things happened. And if they immediately reverse they will tell you the opposite five minutes later.
When you start to read about some predictors like Super Forecasting and Wisdom of Crowds, you realise that this is not always a fair game.
As are most days - according to what I’ve posted Retail Sales are relevant - lower sales encourages lower prices, thus lower cpi - thus the risk to business of higher rates diminish.
The thinking about ‘priced in’ is also relevant - today US posted a miss on Retail Sales - not much reaction on USD - priced in perhaps with the cpi release?
Interesting though the reaction in Wall St at the news - investors in US stocks pricing in what they see as the road ahead for Interest rates in the US?
A quick add on - John J Murphy is known as a TA analyst - he wrote a few years back about risk and intermarket analysis.
He noted that the Russell 2000 (small caps) is a good indicator of investor risk sentiment.
The thinking is that investors seeking greater return will take on greater risk - small caps suit this - they are more risky but offer the potential of greater yield.
Relevant to this thread only GBP instead of USD - this morning UK CPI release.
Again the perfect example of price reaction driven by algo/hft
UK cpi is down - not a huge amount - but down nonetheless - significant in that lower food prices are a contributing factor.
Back to the int rate thinking - lower prices mean lower rates etc.
One train of thought this morning is that the BOE will not raise as high as .50 but rather .25
Anyways I’ve spoken about this org before - the BRC - they are very proactive in the UK market - they highlighted in their briefing 2 days back about lower food prices in UK.
