US April CPI Could be the key Catalyst for S&P 500 Rebound, Deeper Greenback Sell-off

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An attempt by S&P 500 to decisively break below 4000points on Tuesday was not successful, however, the subsequent rebound has notyet found wide support among buyers. Retail and institutional sentimentindicators are in an extremely bearish zone (13-year high), which increases theodds of a rebound in case of emergence of some bullish catalyst:Today’s US CPI release for April appears to be a good potential bullish trigger. Headline inflation is expected at 8.1% (down 0.4% compared to March), core inflation at 6% (down 0.5% compared to March). Core monthly inflation is expected to come at 0.4% and this is where the market will look for a signal that price growth starts to fade as YoY inflation will likely be distorted due to base effects. If MoM inflation falls short of expectations, pressure on the Fed to fight inflation, as the market perceives it, will ease, and policy tightening will shift to a less aggressive pace than has been priced in.However, three Fed officials (Mester, Waller and Barkin) were quite open yesterday in favor of two consecutive 50bp rate hikes in June and July, after which the Fed will have to conduct an interim assessment of impact of the rate hikes on inflation in order to understand how to proceed further in the second half of the year. Lower-than-expected monthly core inflation will likely help market to rule out the case for 75 bp rate hike at the upcoming meeting, which in itself will already be a bullish signal for the market.At the same time, the ECB continues to ramp up its hawkish rhetoric. This can be seen from yesterday’s speech by member of the Governing Council Nagel. In his opinion, the risk of “late action” has increased significantly, the ECB should curtail its bond buying program as early as July (the ECB spoke about September at the last meeting) and raise interest rate on deposits in the same month if incoming data reveals no signs of inflation easing. Inflation in the German economy was 7.4%, according to data released today.The continued consolidation of USDCNY around 6.73 at least means that there is one less reason to sell risk today. Tesla CEO Elon Musk described the lifting of the Shanghai lockdown yesterday as “rapid,” which is also encouraging. Consumer inflation in China beat expectations accelerating to 2.1% YoY, once again emphasizing that the challenge posed by inflation is global.The dollar continued to snap back recent gains on Wednesday, the greenback index fell below 103.50 (a weekly low). If US equities bounce today, a stronger move down to 103 will likely follow. According to JP Morgan, the dollar’s recent strength is due to a downward reassessment of growth forecasts outside the US rather than the hawkish Fed. Despite the fact that the Fed pushed back on 75 bp rate hike, long positions in USD, according to the bank’s analysts, still make sense. In the stock market, JP Morgan sees the defensive sector (companies whose revenues are less correlated with the phases of the business cycle) as the favorite, which tend to outperform in the bear market and hence will draw increased attention from market players.In my opinion, in the event of a worse-than-expected CPI report today, EURUSD has a chance to make a tactical bounce, given that there is a necessary prerequisite for this – substantial decline in the last few months and range-bound movement, which is a classic technical analysis case for a reversal. The pair is also near the lower bound of the existing bearish channel, which could be also used by market players as an indication of support zone:

Source: Tickmill

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