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When it comes to U.S. economic data, the only factor that needs to be considered is how the economic reports will impact the Federal Reserve's decision to increase or decrease stimulus.  Unfortunately this morning's U.S. numbers do not give us a clear cut answer to what the Federal Reserve should do and in fact conflicting signs from the U.S. economy is their greatest problem. There is no question that the central bank is considering QE3 but recent comments from Federal Reserve officials suggests that they are not committed to it. One of the problems for traders banking on QE3 is that inflation is on the rise.  Consumer prices rose 0.4 percent last month, which was much stronger than expected. On an annualized basis, CPI growth rose from 3.6 to 3.8 percent, the highest since September 2008.  Most importantly however, core CPI rose back to 2 percent, a level not seen since November 2008.  With core CPI back at the central bank's 2 percent target, the argument for more stimulus has hit a major road block. The main reason why central banks around the world were even open to the possibility of more stimulus was because inflationary pressures around the world have declined but the latest U.S. numbers show otherwise.  If the Fed were to introduce another round of Quantitative Easing, they risk stoking inflation expectations at a time when the U.S. economy is extremely vulnerable. Unless the Fed believes that the uptick in prices are temporary (and unfortunately the rise in core CPI suggests that it isn't), this morning's CPI report means the central bank could be less aggressive next week.

The current account balance also improved in the second quarter thanks to an increase in the balance of incomes.  The Empire State manufacturing survey and jobless claims reports on the other hand weakened.  Manufacturing activity in the NY region declined for the fourth consecutive month, reaching its weakest levels since November 2010.  Jobless claims also ticked higher to 428k from 417k.  As long as claims remain above 400k, both investors and the Federal Reserve will remain on edge about the outlook for the labor market.  Industrial production and the Philly Fed index will be released later this morning. No major upside surprises are expected.  USD/JPY has trickled higher on the back of this morning's reports as the hot CPI number gives investors reasons to reconsider their FOMC positions.  There is a possibility that we could see additional some profit taking on short dollar positions going into FOMC.  

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About The Author

Kathy Lien began her FX trading career 10 years ago at J.P. Morgan Chase. After graduating New York University’s Leonard Stern School of Business at the age of 18, Kathy joined the bank's interbank FX trading desk and eventually moved to the cross markets proprietary trading desk. In the interbank market, her ability to create solid fundamental and technical analysis from the myriad of information on the market helped her trade forex spot and options. Her experience eventually led her to be chief strategist at Daily FX where she worked until she joined GFT in 2008.

With her knowledge of forex, as well as her experience trading other products, such as interest rate derivates, bonds, equities, and futures, Lien has built a reputation as an international currency analyst. She is frequently quoted on CNBC, Bloomberg, Fox Business and Reuters. Lien has also written for publications like Active Trader, Futures, and SFO magazine. She is the author of the newly updated Day Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Boris Schlossberg.

To buy Kathy’s newly updated Day Trading and Swing Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, click here.