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#1 14-10-2020 13:15:20

johnedward
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From: Paris - France
Registered: 21-12-2009
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EUR/USD: US CPI thrust dollar to the upside

EUR/USD: US CPI thrust dollar to the upside


On Tuesday, the U.S. CPI (Consumer Price Index) kicked off a rise in the USD. The EUR/USD dropped from 1.1800 to 1.1729, while the GBP/USD fell even further.

The USD's upward movement was a bit surprising in the sense that the greenback closed the previous week at its lowest level. In addition, as the stock market rallied, with the Dow Jones threatening to break through the 29,000 mark, the pressure on the USD remained the same during the Monday bank holiday (i.e. Columbus Day).

This turnaround, although not significant in absolute terms, seems significant for the simple reason that the market has traded in ranges in recent months. As the Trump/Biden election approaches, it is likely that the ranges will hold, making trades likely to moderate this movement.

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U.S. Inflation Data for last month

The CPI: Core and basic data posted at 0.2%, down from the previous 0.4%, showing a disinflationary trend.

So why did the USD rise if inflation is still below the Fed's target and is trending lower? As always, in trading and interpreting financial data, the devil is in the details.

First of all, it's the monthly data. If we add them to the year-over-year changes, we see that headline inflation was 1.4% year-over-year and, more importantly, core CPI was unchanged at 1.7%. Of these two data, the second is the most relevant because it represents the benchmark used by the Fed to measure price stability. In addition, it is quite close to the Fed's 2 per cent price stability objective, although the mandate has recently changed from a linear 2 per cent target to an ACI (average inflation target) at the 2 per cent level.

In other words, the damage to the overall situation has not been as great as many might have expected. If we consider, for example, the inflationary trends in the Eurozone, it can be said that the Fed has been more successful in generating appropriate inflation levels than the Europeans.

As mentioned earlier, this data is unlikely to change market expectations in the weeks leading up to the Trump/Biden election. Overall, the September data showed that inflationary pressures were low and that spending on goods is expected to weaken further.

For the markets, the focus remains on the fiscal package being negotiated in Washington and, for economists, what will be the impact on the prices of goods and services?

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