Today is a special day for financial markets as the US Bureau of Labor Statistics releases CPI for June. It’s no secret that the Fed tied monetary policy to developments in inflation, so its acceleration will mean that the Fed’s lead in the policy tightening race will only increase, and vice versa, an inflation print below consensus should promote expectations that the gap in the pace of policy normalization between the Fed and other central banks will narrow somewhat. In fact, this will be the driver of price changes in almost all asset classes.
Headline inflation is expected to hit a new high of this business cycle (8.8%) and core inflation to slow from 6% to 5.7%. The expected acceleration in headline inflation is due to the jump in US fuel prices in June from $1.17 to $1.3 per liter:
Given this circumstance, a small positive inflation surprise will unlikely trigger sizeable shift in tightening expectations; much more unexpected will be inflation below the forecast of 8.8%, as well as a stronger slowdown in core inflation which is less volatile and characterizes key consumer trends.
If headline inflation accelerates above 9.0%, a bearish breakout of the EURUSD level of 1.00 can be expected while inflation reading in line with the forecast will likely lead to a false breakout and there is a risk that “sell on the facts” scenario will happen in the US dollar, given the significant overbought dollar in the medium term (RSI on the daily timeframe above 74 points).
Currencies showing high sensitivity to expectations of global business cycle – the Norwegian Krone, the Australian dollar, the New Zealand dollar, are rising today, the Japanese yen is consolidating near highs against the dollar (level 137). Futures for US indices show a slight increase, European stock indices are in the red.
Oil prices are trying to recover, but reports that China may be facing a fresh outbreak of covid vases (400 new cases in Shanghai) and risk of tightening of sanitary measures increase concerns about demand from the key consumer. OPEC said yesterday that demand for oil will exceed supply by 1 million barrels this year, but events in China have likely overshadowed that message. There is a risk of further decline in prices, as the threat of a new lockdown in China’s major industrial and financial center grows.
Leading survey-based indicators of investor and business sentiment deteriorated in June. Shortly after the publication of investor confidence in Germany on Tuesday, which fell to the lowest level since the debt crisis in the EU in 2011 (-53 points), in the US, the index of small business optimism came out, the fall of which also markedly exceeded expectations as inflation climbed to the first the place of uncertainty factors among US small firm owners:
The risk of a new wave of risk aversion is rising, and a policy tightening by central banks will only reduce risk appetite in equity markets and increase demand for safety plays. The RBNZ raised the rate by 50 bp, the Bank of Canada is expected to raise the rate by 75 bp today. If US inflation jumps above 9.0%, risk assets are likely to come under serious pressure, and the dollar will continue to rally.
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Written by Arthur Idiatulin
Arthur is a stock market and currency expert with a vast experience in market research and investment consulting. Dedicated Forex trader and financial practitioner, keen on testing new trading techniques and investment strategies.
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