The USD is in a soft spot amid a global rush into yield and little perceived threat from the Fed, at least until Chair Yellen’s Jackson Hole appearance. While we think USD pullbacks still represent medium-term buying opportunities, bulls will need to be patient.
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For the week ahead, our economist’s forecasts do not imply a significant boost to the USD from the economic data. We expect the increase in the core CPI to slow to 0.1% MoM led by softer medical and transportation services, which would bring the YoY rate down to 2.2%. Headline inflation is expected to remain flat MoM due to a decrease in energy prices, taking the YoY rate down to 0.9%. The decline in the annual pace of inflation should boost those on the FOMC who argue for waiting for a stronger pick-up in inflation before making the next policy-tightening move.
We will hear more on that from the July FOMC minutes on Wednesday. As usual, the minutes are likely to offer a broader range of dovish and hawkish views but we doubt they will significantly alter the message contained in the July FOMC statement. The main area to watch for potential surprises is the motivation behind the addition of the text “near-term risks to the economic outlook have diminished”.