US CPI data will set the tone for the day

A customer pushes a shopping cart during the grand opening of a Wal Mart Stores Inc. location in the Chinatown neighborhood of Los Angeles California

US factory gate prices slip in July

Odds of a Fed rate rise during the December meeting now stand at around 40% according to the CME Group's 30-day Fed Fund futures prices.

United States producer prices slipped by 0.1% month-on-month in July, according to the Department of Labor, which pushed the year-on-year rate of growth down from 2.0% for June to 1.9% in July. Core is expected at 1.7% y/y, the same as in June. During the last 12 months, the CPI showed consumer prices rose by 1.7%, slightly higher than in June but below the 1.8% expected. Compared to last July, headline prices picked up a bit to a 1.7% year over year pace versus 1.6% year over year, while the ex-food and energy component was flat at a 1.7% year over year clip. It's the fourth month in a row that the core CPI increased by 0.1%.

He added: "Overall, we view last month's downward adjustment in inflation as temporary and the peak in inflation is yet to be reached". It was the first drop in wholesale prices since a decline of 0.2 percent last August.

I would argue though that if the US end up in conflict with North Korea that could have a significant effect on the strength of the US Dollar.

The U.S. inflation slowdown may be getting longer, even after most economists and Federal Reserve policy makers judged it to be transitory.

Interest rates have already had a big move lower this week, so are showing little reaction to this morning's numbers showing inflation continuing to come in below central planner expectations.

The Fed is expected to outline a program to start offloading its $4.2 trillion portfolio of Treasury bonds and mortgage-backed securities at its September 19-20 policy meeting.

"If the data continues to come in on the softer side, the market might start to price the Fed staying on hold this year", said Sireen Harajli, FX strategist at Mizuho in NY.

"Despite economists' conviction inflation is about to accelerate, prices are in retreat", he wrote in a research note. "Stronger wage growth as businesses compete for scarce workers will also contribute to higher inflation in the second half of this year and in 2018".

Rising medical care costs, housing and food pulled the CPI up in July, after no change in June and May's 0.1% dip. Food prices were unchanged in June.

Dudley also expected further labour-market strengthening and moderate economic growth.

The Labor Department will release its report on consumer prices on Friday. Prices for apparel rose 0.3 percent after four straight monthly declines.

While picking up more quickly than personal consumption expenditure (PCE) - the Federal Reserve's preferred measure of inflation - the consumer price index (CPI) remained stubbornly below the Fed's target rate of 2%.

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