On Wednesday night, the much-anticipated US CPI data for July is set to be released. The market expects the annual US CPI rate in July without seasonal adjustments to be 8.7%, down slightly from the previous value of 9.1%. If the CPI falls, this may pressure the dollar, creating opportunities for other non-dollar currencies and the gold market.
However, investors should note that the annual rate of the core CPI in the United States without seasonal adjustment in July is expected to be 6.10%. It is expected to continue rising from the previous value of 5.90%, making most investors worry that the dollar’s decline may be limited. There may still be opportunities for a dollar rebound in the future.
As inflation in various countries worldwide continues to soar, market concerns of an economic slowdown are gradually heating up. As a result, investors are worried that the global energy demand will decline progressively; hence many have recently sold their commodity investments. As a result, US crude oil prices fell nearly 10% at one point.
The sharp fall in energy prices allowed the US CPI to fall in July. In particular, the decline in gasoline prices has led the market to expect that CPI data will continue falling. Due to the last sharp rise in oil prices, some Americans have changed their travel patterns and reduced the distances and frequency of their driving.
In the past two months, gasoline prices in the United States have been falling, registering the fastest decline in over ten years. More than 81,000 gas stations across the US are now pricing fuel at $3.99 a gallon or less. However, the outlook for most regions is continuing to decline, said DeHaan, director of petroleum analysis at GasBuddy in the US.
There is also news of a decline in food prices. The Food and Agriculture Organisation of the United Nations said on 5th August that the global food price index fell by 8.6% in July, the most significant decline since October 2008. Among them, the price of wheat fell by 14.5%, and the cost of corn fell by 10.7%.
However, a report from Goldman Sachs shows that the investment bank remains optimistic about the future performance of oil prices. The bank said solid factors still support oil prices, and the insufficient supply levels in recent months had been higher than expected. As a result, Goldman Sachs estimates that London oil prices will increase to $110 a barrel in the third quarter, down from a previous forecast of $140, and to $125 in the fourth quarter, $5 less than an earlier forecast. Although Goldman Sachs has lowered its oil price forecast for this quarter, with the advent of winter, crude oil prices are still likely to rally higher.
So investors may ask, will this July CPI data signal a gradual decline in US inflation risks? Unfortunately, the answer is that such judgments are premature.
Suppose inflation falls back as the market expects. In that case, the market’s bets on the Fed’s aggressive interest rate hikes may cool down, making the dollar more likely to come under pressure shortly, benefiting gold prices. First, however, we need to pay attention to the core CPI data after excluding the more volatile energy and food prices. The market expects the data to continue to rise, indicating that the inflation risk still exists and has not been eliminated. This is also one of the market’s key focus areas. If core inflation continues to rise, it will adversely affect the bulls in the gold market, which may limit the upward momentum of gold prices. In addition, the long-term bullish view of investment banks on oil prices has not changed.
The estimated value of the overall annual CPI rate has been lowered mainly due to the fall in energy prices and food prices. However, there are still significant differences due to geopolitics and global economic prospects. Indeed, it is difficult to say that energy and food prices will stabilise in the future. Therefore, uncertainty about the US CPI’s future direction may limit the dollar’s decline. In addition, investors should pay close attention to the remarks of some Fed officials for clues on the direction of interest rate hikes in September.
