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Consumer Price Index rises 3% in June vs. 3.1% expected

Inflation in the US, as measured by the change in the Consumer Price Index (CPI), declined to 3% on a yearly basis in June from 3.3% in May, the US Bureau of Labor Statistics (BLS) reported on Thursday.

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Follow our live coverage of the market reaction to US inflation data.

This section below was published as a preview of US Consumer Price Index (CPI) data for June at 03:00 GMT.

  • The US Consumer Price Index is forecast to rise 3.1% YoY in June, at a softer pace than May’s 3.3% increase.
  • Annual core CPI inflation is expected to hold steady at 3.4%.
  • The inflation data could confirm or deny a Fed rate cut in September and drive the US Dollar valuation.

The Bureau of Labor Statistics (BLS) will publish the highly anticipated Consumer Price Index (CPI) inflation data from the United States (US) for June on Thursday at 12:30 GMT.

The US Dollar (USD) braces for intense volatility, as any surprises from the US inflation report could significantly impact the market’s pricing of the Federal Reserve (Fed) interest rate cut expectations in September.

What to expect in the next CPI data report?

Inflation in the US, as measured by the CPI, is expected to increase at an annual rate of 3.1% in June, down from the 3.3% rise reported in May. The core CPI inflation, which excludes volatile food and energy prices, is seen holding steady at 3.4% in the same period.

Meanwhile, the US CPI is set to rise 0.1% MoM in June after staying unchanged in May. Finally, the monthly core CPI inflation is forecast to rise 0.2% to match the previous increase.

Federal Reserve (Fed) Chairman Jerome Powell delivered the Semi-Annual Monetary Policy Report and testified before US Congress earlier in the week. In his prepared remarks, Powell reiterated that it will not be appropriate to cut the policy rate until they gain greater confidence in inflation heading sustainably toward 2%. When asked about the latest developments in the jobs market, “the most recent labor market data sent a pretty clear signal that the labor market has cooled considerably,” he noted. In the end, his remarks failed to move the needle with respect to market pricing of a Fed rate cut in September. According to the CME FedWatch Tool, the probability of the Fed leaving the policy rate unchanged in September stands at around 26%, virtually unchanged from where it stood before this event.

Previewing the June inflation data, “we expect the June CPI report to show that core prices remained largely under control after posting a surprisingly soft 0.16% gain in May,” said TD Securities analysts in a weekly report.

“Headline inflation likely printed flat m/m again (-0.01%) as energy prices continue to provide large relief. Note that our unrounded core CPI forecast at 0.18% m/m suggests larger risks for another dovish surprise to a rounded 0.1% increase,” analysts added.

How could the US Consumer Price Index report affect EUR/USD?

Investors remain optimistic about a Fed rate cut in September, but the market positioning suggests they are not fully convinced yet. Hence, a smaller-than-forecast increase in the monthly core CPI, a reading of 0.1% or smaller, could confirm a policy pivot in September. In this scenario, the US Dollar could come under selling pressure with the immediate reaction.

On the other hand, an increase of 0.3% or bigger could highlight a lack of progress in disinflation and cause market participants to reassess the probability of an interest rate reduction in September. In this case, investors could price in a widening policy gap between the European Central Bank (ECB) and the Fed, opening the door for a sharp decline in EUR/USD in the near term.

Eren Sengezer, European Session Lead Analyst at FXStreet, offers a brief technical outlook for EUR/USD and explains: “EUR/USD holds above the 100-day and the 200-day Simple Moving Averages (SMA) following the pullback seen earlier in the week, reflecting sellers’ hesitancy. Additionally, the Relative Strength Index (RSI) indicator on the daily chart holds above 50 ahead of the US inflation data, indicating a slightly bullish bias in the short term.”

“The Fibonacci 23.6% retracement level of the mid-April-June uptrend forms interim resistance at 1.0850. Once EUR/USD clears this level, it could face next resistance at 1.0900-1.0915 (psychological level, June 4 high) before targeting 1.1000. On the downside, technical sellers could take action and force EUR/USD to stretch lower if the pair drops below 1.0800 (100-day SMA, 200-day SMA) and starts using this level as resistance. In this scenario, 1.0750 (20-day SMA) could be seen as the next support before 1.0680 (Fibonacci 78.6% retracement).”

Inflation FAQs

Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.

The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.

Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.

Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.