The US dollar exposed by the weakening of price pressures (Daily analysis 15.09.2021)

The dollar's quotations over the last few hours seem to resemble a bit of a swing. The US currency cheapened after yesterday's inflation data, but is recovering due to the rapid disappearance of risk appetite.

What plays a significant role in this is another worrying set of data from China, where retail sales and industrial production were very poor in August. The same was also true a month earlier - the series of worrying data resulting largely from the deterioration of the epidemic situation is getting longer. The ragged, jerky and chimerical trading without any clear relief for the Polish zloty may continue for another week until the meeting of the Federal Reserve.

US inflation slows, Fed wins time

The Federal Reserve's reluctance to announce that pandemic asset purchases will be a thing of the past at next week's meeting was virtually a foregone conclusion given the recent disappointing labour market report. A meagre gain in non-farm payrolls meant that many policymakers would want to wait before cutting off the monetary stimulus to be sure that such a move is not premature and that "decisive further progress" in the post-pandemic recovery has been made. After all, almost 5.5 million of the more than 22 million jobs lost remain to be opened. Some comfort to those opting for this stance is provided by the consumer inflation data for August.

Of course, against a historical background, its growth rate is still very high - having slowed from just 5.4 to 5.3% year-on-year. The market largely focused on the fact that key metrics came in below forecasts. What also attracted attention was the fact that prices in core categories, after excluding the most volatile food and fuel prices, rose by just 0.1% compared to July. This translates into an annual growth rate of 4.0%, well below the historical reading for June, indicating the highest year-on-year rate of 4.5% since the early 1990s. However, one cannot ignore the fact that the prices of goods and services that shot up after the unfreezing of the economy are beginning to fall: used cars, the cost of car rentals, motor insurance, hotel rates and airline tickets among others, have decreased. In other words, inflationary pressure has ceased but is more widespread, visible in a larger category of goods.

Worrying news for the dollar

At the same time, yesterday's reading did not provide any clear arguments to those supporting the thesis that Jerome Powell is wrong in his assessment of the durability of inflationary phenomena. The Fed Chair continues to repeat the mantra that price pressures are temporary and originate from supply-side and one-off factors. Therefore, one could say that he is on the same page as the President of the National Bank of Poland, Adam Glapinski. Moving back to US monetary policy: slowing the momentum of price increases not only makes the need for normalisation less pressing. If this trend is sustained, the Fed will be able to afford greater flexibility in tapering asset purchases, which is currently still being conducted at a minimum pace of 120 billion USD per month. Flexibility, in this case, is synonymous with slowness. At the same time, the first possible moment for an interest rate increase in the US is automatically postponed. This is bad news for the dollar and good news for the currencies of a basket of emerging economies. We expect that local highs in its strength were established at the end of August. In our currency forecasts, we assume that the EUR/USD pair will drift towards 1.20.