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After the Fed said it would be data-dependent about its next rate decision, the latest economic figures have become much more likely to jolt the market. Last week's jobs numbers were a bit of a mixed bag, but Fed officials later said they were largely in line with expectations. That would somewhat imply that the Fed's view that another rate hike is still preserved.

Which means there is more weight being transferred to the upcoming CPI figures. If there is another miss like last time, the markets could be convinced that the Fed won't go through with its next hike. With more and more traders betting on a soft landing, this could bring risk appetite back. While that might not be good for the dollar, commodity currencies could get a boost.
 

But there is a flip side

This rosy outlook contradicts the views of economists, who are expecting inflation to tick back up when it's reported next Thursday. Part of this is due to "base effects", where the current rate is higher than the corresponding month last year. Thus, even if the inflation rate stayed the same (which is what economists are forecasting) last month, the annual rate will tick up.

Since the Fed cares more about the core rate than the headline rate, that's where the market could end up being disappointed. The latest reports show that wages in the US continue to grow at above a 4.0% rate, which puts pressure on the core inflation rate. On the other hand, the recent Manheim report showed the price of used cars fell in July, which could help bring down the core rate.
 

The second mandate in focus

Until recently, with inflation peaking above levels not seen in several decades, the Fed has been primarily focused on getting consumer price changes to behave. But with inflation around the 3.0% level, the Fed could switch its focus towards the jobs market. That means that if July's CPI figures are largely in line with expectations, it could still mean the Fed is lined up for a rate hike. The Fed could be moving to take on the labor market in order to bring down the core rate.

The other thing that could diminish the impact of Thursday's data is that there will be another round of CPI figures coming out in early September before the Fed meets on the 20th. That could present an opportunity for another change in direction, particularly if the data surprises investors.
 

What to look out for

US July headline inflation is expected to tick up to 3.1% from 3.0% prior. This makes it quite easy for the markets to be spooked since that implies inflation is rising even faster. That could increase bets that the Fed will hike, even if the core rate comes in as expected. The rising price of gasoline over the last month due to higher crude prices could increase the risk of CPI beating expectations.

The core inflation rate for July is expected to stay steady at 4.8%. Almost 90% of traders expect another rate pause in September, but a move back above 5.0% could shake that consensus. On the other hand, a few more traders joining an already solid pause consensus is less likely to move the markets.

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