Talking Points

- The headline rate of US inflation eased to 1.6% in June from 1.9% in May, below the expected 1.7%.

- The core rate was unchanged at 1.7%, in line with forecasts, but there was an unexpected decline in retail sales.

- In the markets, the US Dollar dropped in response.

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US inflation, as measured by the consumer price index, fell to 1.6% year/year in June, below the expected 1.7%, from 1.9% in May. The core index was unchanged, as forecast and unchanged from the month before.

However, there was an unexpected fall in retail sales month/month. The drop of 0.2% compared with a predicted increase of 0.1% and the Dollar dropped on the data, boosting EUR/USD. The May drop in retail sales was revised up to 0.1% from 0.3%.

Chart: EUR/USD Five-Minute Timeframe (July 14, 2017)

US Dollar Falls as Inflation Drops to 1.6% in June, Retail Sales Drop Too

Chart by IG

Janet Yellen, who chairs the Federal Reserve, made it clear in her testimony to Congress this week that she is worried about the weakness of US inflation, which remains below the Fed’s 2% target as measured by the annual change in the price index for personal consumption expenditures (PCE).

She also said that inflation risks are “two sided” but her testimony was regarded in the markets as less hawkish than previously, even though she remains relatively upbeat on the US economy, believing its current weakness to be transitory. This has divided opinion on whether there will be an increase in the Federal Funds rate in December, with the CME FedWatch Tool currently showing the markets split virtually 50/50 between an unchanged target range of 1.00% to 1.25% and a quarter-point increase to 1.25%-1.50%.

On their own, the latest inflation figures are unlikely to sway the rate-setting Federal Open Market Committee one way or the other but further soft inflation numbers in the months ahead would likely result in FOMC members scaling back their hawkish rhetoric, cooling rate-hike expectations and therefore tending to weaken the US Dollar.

--- Written by Martin Essex, Analyst and Editor

To contact Martin, email him at martin.essex@ig.com

Follow Martin on Twitter @MartinSEssex

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