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The August read on the US consumer price index, CPI, came in hotter than expected and sent the dollar moving higher. The read is 0.4%, a tenth hotter than expected and up 0.3% from the previous month. The gains are due primarily to increases in the energy index and more specifically gasoline. On a year over basis CPI is running at 1.9%, up 0.2% and just under the Fed’s 2% target rate.

The energy index gained 2.8% month to month, up 6% year over year, driven by a whopping 6.3% increase in the cost of gas. Gas prices have risen for fourth straight months and are underpinning the recent rise in headline inflation. A 0.5% increase in the cost of shelter also contributed to the August increase. On a core basis, ex-food&energy, CPI rose a more moderate 0.2% and is up only 1.7% YOY.

While the read is still well within acceptable levels and below the Fed’s target it does cause concern for the market. First, the read is above expectations and a sign of improvements within the economy. Improvements within the economy are good save for when it leads the FOMC to raise interest rates. This data does not suggest a rate hike is imminent but it does give reason for the market to pause.

The FOMC has been on a path of rate hikes for some time, a path that sent the dollar to its highs last year. Since then, declining expectations have weakened the dollar to long term lows as it rebalances against the euro and yen. With this new data forward outlook should firm and lend strength to the dollar. The EUR/USD fell hard on the news, shedding more than 50 pips in under 5 minutes. This move was met by support which drove prices back up to break even for the day.

The pair continues to consolidate below the 1.2000 resistance level and does not appear to be gaining strength. Long term esistance was tested last week on Mario Draghi’s comments and ECB outlook but that resistance was confirmed. The pair is now testing near term support above 1.1850 with a real possibility of falling through. The indicators are consistent with a move lower but do not yet confirm reversal. A break below support could move the pair down to the 1.8000 support target along a major up trend line.

EUR/USD

In the near term this pair is likely to remain within trading ranges near current levels. Fundamental outlook for the underlying currencies are both in transition and could easily sway near term direction. The next major hurdle for the pair is the FOMC meeting scheduled for next Wednesday. As stated previously, there is little expectation for a rate hike which means the statement will be more important than ever.

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NOTE: This article is not an investment advice. Any references to historical price movements or levels is informational and based on external analysis and we do not warranty that any such movements or levels are likely to reoccur in the future.
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