U.S CPI set to inject some serious volatility into proceedings

Today’s U.S CPI report (Jul) will have a big, big say into the short-term directional outlook for markets. After that frosty payrolls report last Friday, markets are hoping that there is finally a weakening inflation profile, which might help to ease the pressure on the Fed. Note, we said ‘hoping’.  In terms of outcome, the stronger the (CPI) number, the more markets will price in bigger and more frequent U.S rate hikes, and the softer the print, the more positive markets will react (higher equities and risk assets) and re-price for a softer FOMC rate trajectory. This is all especially important, given that markets have had little choice but to re-price to a more aggressive Fed, given the persistently stronger Labor market, and bullish rate-speak from Fed members over the past week.

What about the dollar?

In theory, the dollar should go in the same direction as the data, so if there is a strong inflation print, one would expect a stronger dollar, and therefore a weaker risk appetite for broader asset prices, and vice-versa. There is also likely to be a fairly binary reaction as far as the dollar is concerned, so if EUR/USD pops higher, expect the likes of GBP/USD to follow, and a weaker USD/CAD, and the dollar will clearly remain highly sensitive to the outcome.

What do the experts think?

The people who work in dark rooms tell us that the latest estimates currently expect headline inflation to have dropped from 9.1% to 8.7% (YoY), and from 1.3% to 0.2% (MoM). Take the nasty bits of food and energy out, and that figure is expected to have risen from 5.9% to 6.1% (YoY), but declining on the monthly print to 0.5% from 0.7%. Clearly, the drop in the headline inflation can be attributed to those gradually softening energy prices over the past month, and as we go to print, front-month Brent and Crude both remain well below the $100pbl mark. Furthermore, global supply chain pressures have continued to ease since the beginning of the year, and shipping costs have decreased as a consequence. Weaker consumer demand is also an increasing contributor, given the big rises in interest rates recently, impacting their spending power. We live in hope.

German Inflation

The latest German CPI inflation data has just been released a little earlier this morning. Markets had been expecting a stable figure near to last month’s 8.5% for the key harmonised Index of CPI (YoY). In the end, the analysts were spot on, with the release exactly matching expectations, which has ensured that EUR/USD remains close to the 1.0200 region.

What else has been moving currencies?

‘Rangebound’ is the word to describe currency movements throughout this week. On a busy day, a major currency pair might move as much as 1.5-2% in any given direction, especially if something interesting is happening. Most of the major pairs have been contained within a band that has not exceed 0.3% so far this week, which will highlight that most market participants are adopting the ‘sit on the fence’ strategy. GBP/USD briefly rallied over 1.2125 yesterday, but then drifted lower. GBP/EUR has been between 1.1810 and 1.1890 since last Thursday. Even the super-volatile USD/JPY finally ran out of stream, and was glued to the 135.00 handle throughout the day, highlighting how much of a lack of directional bias there has been amongst the majors. That is all set to change late today.

What else is happening today?

USD – MBA Mortgage Applications, CPI, Wholesale inventories, EIA Crude Oil Stocks Change, Monthly Budget Statement,

NZD – REINZ House price index, Visitor Arrivals

GBP – RICS Housing price Balance (released at 23.01)

AUD* – Consumer Inflation Expectations

*Data released overnight