US CPI Tomorrow
Atualizado
8:30 am EST tomorrow is a busy report for traders. I have compressed and summarized some info for tomorrow from recent data by Adam Button.
Some goods news came today with a New York Fed survey showing one-year inflation expectations at a 10-month low and three-year inflation expectations at the lowest in nearly two years, but Fed officials will want to see actual progress before relenting from their hawkish stance. The expectations for the CPI report are:
+8.1% y/y vs +8.5% prior
-0.1% m/m vs 0.0% prior
Core +6.1% y/y vs +5.9% prior
Core +0.3% vs +0.3% prior
From those numbers, the tension in the report is obvious. Headline inflation has flattened while core continues to accelerate at an alarming pace. At some point, the softening headline will feed back into the core, but for the Federal Reserve they need to see the clear evidence before any kind of pivot. This will certainly be another step in the right direction but the Fed is highly protective of its inflation-fighting credibility and will stay hawkish for now. At the same time, the market is forward looking and may not wait for the Fed to pivot to price in a turn. Energy prices continue to fall and pandemic-affected supply chains are healing. At this time next year, inflation could be back to target but it will all depend on how core develops.
Simply, if both are strong we'll see the US dollar strengthen; if both are weak, we'll see the dollar weaken. Where it gets interesting is if they're opposing...
If headline is cool but core is hot, we will see some dollar strength. If headline is hot but core is cool, we'll see dollar weakness. That all depends on how much each of them miss but in general, I will defer to core because that's what the Fed is watching closest.
Overall, I get the sense that many traders are looking to trade a Fed pivot and signs of softness in CPI would play into that. The reaction would be strength in equities, adding to recent moment. In general, that will mean dollar softness.
Looking forward, what does this all mean though? Comments late last week from top Federal Reserve officials suggest that even a soft CPI won't dissuade a 75 basis points cut, but the report will have ramifications for rates further down the line and could impact Fed communication at next week's meeting. At the moment, the market is pricing in roughly 93% of a 75 bps hike and its doubtful that CPI data changes that.
Technically, to the upside we see resistance around 108.7 and 109.6. To the downside, our recent low from a few weeks ago sits at 107.588 and softer data tomorrow should break that with ease with a focus on 106.6 being our daily support. A break of that zone would then give a bearish undertone to the DXY (as most traders now see this recent weakness off of last week's 110.78 high as being corrective at best).
Guessing is risky as always but I tend to side with downward drive of the DXY this week with a potential to have some upward momentum beginning next week rolling into the Fed's rate decision. We will see what happens!
Some goods news came today with a New York Fed survey showing one-year inflation expectations at a 10-month low and three-year inflation expectations at the lowest in nearly two years, but Fed officials will want to see actual progress before relenting from their hawkish stance. The expectations for the CPI report are:
+8.1% y/y vs +8.5% prior
-0.1% m/m vs 0.0% prior
Core +6.1% y/y vs +5.9% prior
Core +0.3% vs +0.3% prior
From those numbers, the tension in the report is obvious. Headline inflation has flattened while core continues to accelerate at an alarming pace. At some point, the softening headline will feed back into the core, but for the Federal Reserve they need to see the clear evidence before any kind of pivot. This will certainly be another step in the right direction but the Fed is highly protective of its inflation-fighting credibility and will stay hawkish for now. At the same time, the market is forward looking and may not wait for the Fed to pivot to price in a turn. Energy prices continue to fall and pandemic-affected supply chains are healing. At this time next year, inflation could be back to target but it will all depend on how core develops.
Simply, if both are strong we'll see the US dollar strengthen; if both are weak, we'll see the dollar weaken. Where it gets interesting is if they're opposing...
If headline is cool but core is hot, we will see some dollar strength. If headline is hot but core is cool, we'll see dollar weakness. That all depends on how much each of them miss but in general, I will defer to core because that's what the Fed is watching closest.
Overall, I get the sense that many traders are looking to trade a Fed pivot and signs of softness in CPI would play into that. The reaction would be strength in equities, adding to recent moment. In general, that will mean dollar softness.
Looking forward, what does this all mean though? Comments late last week from top Federal Reserve officials suggest that even a soft CPI won't dissuade a 75 basis points cut, but the report will have ramifications for rates further down the line and could impact Fed communication at next week's meeting. At the moment, the market is pricing in roughly 93% of a 75 bps hike and its doubtful that CPI data changes that.
Technically, to the upside we see resistance around 108.7 and 109.6. To the downside, our recent low from a few weeks ago sits at 107.588 and softer data tomorrow should break that with ease with a focus on 106.6 being our daily support. A break of that zone would then give a bearish undertone to the DXY (as most traders now see this recent weakness off of last week's 110.78 high as being corrective at best).
Guessing is risky as always but I tend to side with downward drive of the DXY this week with a potential to have some upward momentum beginning next week rolling into the Fed's rate decision. We will see what happens!
Comentário
A new 30m supply zone has formed which may act as a turning point upon CPI release.
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