August CPI Expected to Surpass Forecasts, Boosting Dollar by 0.03%

Market-leading indicators suggest that the U.S. Consumer Price Index (CPI) for August is likely to surpass expectations, presenting a mild upward risk for the dollar. Analysts from a prominent financial institution released a report indicating that the market-implied August year-on-year CPI growth rate, as suggested by CPI inflation swaps, is 2.91%. This figure is slightly higher than the median forecast of 2.90% by economists surveyed. This minor discrepancy hints at the possibility of an unexpected increase in inflation data, which could further boost the dollar. Historical data supports this correlation, showing that unexpected increases in CPI are typically positively correlated with the rise of the U.S. Dollar Index (DXY).

The report highlights that in the past ten CPI data releases, the pre-market pricing of CPI swap rates accurately predicted the direction of the actual data relative to market expectations in eight instances. The CPI swap rate, acting as a forward-looking market indicator, reflects investors' real bets on inflation. Currently, the CPI swap rate predicts that the August year-on-year CPI growth rate will be 2.91%, and the month-on-month growth rate will be 0.38%. Both figures are higher than the consensus among economists, who predict a median year-on-year and month-on-month CPI growth rate of 2.9% and 0.3%, respectively. Additionally, an economist from a major financial institution predicts that the August year-on-year CPI growth rate will reach 2.92%, slightly higher than the swap market pricing. The bank's economists believe that while inflation in sectors such as airline tickets and dental services is slowing, the impact of tariffs will be more significant than in previous months.

It is worth noting that the Producer Price Index (PPI), to be released tonight before the CPI, may not significantly impact market expectations. The report points out that the monthly PPI reading is too volatile to serve as a reliable signal for predicting the same month's CPI. Historically, CPI surprises have been closely linked to dollar movements. The report indicates that a one standard deviation surprise in CPI data is typically accompanied by a 0.4% move in the same direction for the U.S. Dollar Index. Based on this model, a potential 0.06 standard deviation upside could correspond to a 0.03% increase in the dollar index within one hour of the data release. Last month's market conditions also validated this correlation. Data shows that on August 12th, the dollar index fell in response to the lower-than-expected July CPI data, which was consistent with the direction indicated by the CPI swap rate at the time.

If the inflation data indeed exceeds expectations and drives the dollar higher, different currencies may react differently. The report also emphasizes that in past instances where CPI showed an unexpected increase, the Swedish Krona (SEK) against the dollar typically performed the worst. According to calculations, a 0.06 standard deviation upside surprise could cause the SEK/USD to fall by 0.04% within one hour of the data release. In contrast, the Canadian Dollar (CAD) has shown the most resilience in similar situations, with the smallest decline against the dollar.