US CPI and Why the Financial Media Is Behind the Curve

04/20/2015 9:00 am EST

Focus: FOREX

The staff at points out that the key takeaway from last week for US dollar traders—given the ho-hum Core CPI—is that the US is struggling to get back into gear after a disappointing Q1. However, they also highlight the level to watch for heading into this week's trade.

If you just follow financial media headlines, you've missed a big shift in Federal Reserve policy expectations over the past month or two. While the national news prattles on about how the most recent FOMC minutes mean the Fed is "closer to raising interest rates" (it is, but much in the same way that running a six-minute mile means you're getting closer to running a four-minute mile; there's still a long ways to go), the futures markets have almost completely priced out this possibility.

Unlike the media, the traders who are putting real money on the line only think there's a 4% chance the Fed will raise rates in June, according to the CME Group's FedWatch. More alarmingly for USD bulls, those traders only feel there's a one in four chance that the Fed will hike in September (23%), and the implied probability of any rate hike at all this year is only a coin flip at 50%. While this data can change on a dime, the default assumption that the Fed will raise rates in September at the latest should certainly be called into question.

It was with that background that traders got their first glance at March's US Consumer Price Index figures and that report did little to help either the bullish or bearish case. Consumer prices rose at 0.2% in March, returning to positive territory after three straight months of contraction, but the tick higher only matched the market's expectations. Core CPI, which filters out more volatile food and energy prices, was similarly ho-hum at 0.2% m/m as expected. The key takeaway for dollar traders is that the US economy is struggling to get back into gear after a disappointing Q1, and the longer it takes for economic growth to pick up, the longer the Fed will wait before raising interest rates.

Oh Canada, Our Home and Native Land

Last Friday morning's economic data north of the border was far more impressive. Canadian CPI came out hot at 0.7% m/m (vs. 0.5% expected), while Core CPI was 0.6% (vs. 0.3% eyed). Canadian consumers also loosened their purse strings in March, with both headline and core retail sales beating expectations at 1.7% and 2.0% m/m respectively. In combination with last week's big technical breakdown in USD/CAD and continued strength in oil prices, USD/CAD bears may look to target the key 1.20 level heading into this week's trade.

By the Staff at

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