Weak inflation outlook could bring USD under pressure today

Next week will bring the Fed's rate decision. It is still quite unclear what market momentum the meeting is likely to create. Even if the market has given up on the idea of a rate hike next week the all-important question for the US dollar is how optimistic the Fed will sound as regards the future rate path. 

The reason behind the market's much more cautious rate expectations is the more pessimistic inflation outlook. The Fed had originally given the expectation that inflation was likely to rise notably soon as the reason for its plans to start the rate hike cycle. The market does not yet expect that and as a result expects a much slower rise of interest rates. 

As a result some movement might be seen in the USD exchange rates today, as there are two events on the calendar for today, producer prices and the University of Michigan's consumer poll, that might provide new information regarding expected price developments. 

According to Commerzbank, what is of particular interest are the long term inflation expectations the University of Michigan compiles. The Fed uses these poll-based inflation expectations to judge whether inflation expectations are still anchored or not . 

If the expectations record a surprise rise to above 2.7% this is likely to be seen as a signal that the Fed will not correct its outlook notably lower in September and therefore as a signal that first rate rises are due. 

If on the other hand the poll-based inflation expectations fall the market is likely to feel confirmed in its doubts of the inflation outlook and trade the US dollar weaker, as market based inflation expectations seem to have eased compared with one month ago. 

As at -0.3% mom, a weaker result for producer prices is expected than consensus (-0.1%) there is a lot to suggest that yesterday's USD weakness will continue today. The next psychological resistance in EUR-USD is located at around 1.1450.