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Talking Points:

- August US Consumer Price Index was stronger than expected throughout the report.

- The Federal Reserve meets next week for their September meeting.

- EUR/USD falls sharply as the USD strengthens on the news; USD/CAD spikes higher.

US consumer prices rose more than expected in August, with the headline reading of the Consumper Price Index rising to an annualized 1.1% from 0.8% the month prior, and beating expectations of 1.0%. The core reading, which excludes food and energy prices, grew an annualized 2.3%, compared to expectations of 2.2% and a previous reading of 2.2%.

This CPI report comes during a crucial time for the Federal Reserve. Officials have openly debated in recent days the pros and cons of raising interest rates, as well as the efficacy of traditional monetary policy. Last weel on Thursday into Friday, markets reacted to Boston Fed President Rosengren’s speech that was generally perceived as hawkish and calling for a rate hike sooner than later. Earlier this week, markets reversed as Fed Governor Lael Brainard said much of the opposite, striking a dovish tone and citing risks to the economic outlook.

The Fed meets next week but, despite the strong reading and trend in CPI inflation, is unlikely to raise rates. Fed Funds markets were pricing in a 12% chance for a rate hike next week as of yesterday. Following today’s CPI report, Fed Funds Futures were little changed at 15% for September. Even December has fallen below the 60% historical threshold, with markets only pricing in a 53% chance.

Here are the data lifting the US Dollar this morning:

- USD Consumer Price Index (AUG): +1.1% versus +1.0% expected, from +0.8% (y/y).

- USD Core Consumer Price Index (AUG): +2.3% versus +2.2% expected, from +2.2% (y/y).

- USD Real Average Weekly Earnings (AUG): +0.4% versus, from +1.4% (y/y).

See the DailyFX economic calendar for Friday, September 16, 2016

Chart 1: EUR/USD 1-minute Chart (September 16, 2016 Intraday)

Strong CPI Likely Not Enough To Trigger Fed Action

In the immediate wake of the data, the US Dollar spiked higher against the Euro. The pair fell from $1.12255 to $1.11992 immediately and then continued to fall. By the time this report was written, the pair had settled near 1.11833. With FX volatility edging higher again, it’s the right time to review risk management principles to protect your capital.

--- Written by Omar Habib, DailyFX Research

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