Week Ahead: After NFP beat, US inflation under the spotlight

After three weeks of back-to-back losses, the dollar index received a boost following the robust US jobs report.

Not only did Non-Farm Payrolls beat expectations last month rising by 209,000 jobs versus earlier expectations of 183,000, but June’s figures were also revised higher, to 231,000 from 222,000.

The unemployment rate also declined to 4.3% from 4.4% and most importantly, average earning growth accelerated by 0.3% for the first time since February. Friday’sstrong jobs report will pave the way for the Fed to start reducing the balance sheet for September, but markets are still not confident that a third rate hike will occur this year.

According to CME’s FedWatch, markets still believe that chances of a rate hike in December is below 50% and for this perception to change, it requires inflation to accelerate after declining for five straight months. This is what we are going to know the week ahead.

The Producer Price index and the Consumer Price index are due to be released on Thursday and Friday, respectively. The CPI is what matters most to traders, and after declining from 2.7% in February to 1.6% in June, economists expect prices to edge up 1.8%. If inflation data suggests that prices are back on the rise, this will lead to revaluating the rate hike path and strengthens the case for a December rate hike.

The U.S. dollar, which suffered from steep losses over the past five months looks extremely oversold, despite Friday’srally. The Euro, Aussie, Swedish Krona and Danish Krone are all up by more than 10% against the Greenback in 2017. While much of the repricing occurred in response to a hawkish tilt in global central banks’ rhetoric, I think the move was too fast, and we are likely to see some consolidation in the weeks to come. However, if U.S. inflation makes a U-turn and fiscal policy developments move on the right track, the dollar could have already found a short-term bottom.

I believe central banks such as the ECB and RBA will become more worried about the strength of their currencies. The Eurozone’s economic health is much better than most have anticipated in 2017, and no doubt the central bank wants to prepare markets for tightening policy. However, if the Euro continued to appreciate from current levels, there will be many negative implications on the recovery, and that is why I believe the ECB will indirectly intervene in talking down the Euro. This is another reason why the dollar might have bottomed out on the short run.

The economic calendar is light in the week ahead, as many big traders and fund managers are off to enjoy the summer season. During such times markets become quiet and trading volumes fall. This does not necessarily mean that we shouldn’t expect significant price fluctuations. That is why a close eye should remain on Washington as political drama might take center stage anytime.