Market Mood Mixed Ahead Of US CPI

Asian markets were a mixed bag on Tuesday as caution kicked in ahead of tomorrow’s key US inflation report, although Chinese shares rose after export data beat market expectations. European futures are pointing to a positive open despite the mixed sentiment, with UK financial markets reopening after a public holiday. In the currency arena, the dollar has entered standby mode ahead of talks between US President Joe Biden and congressional leaders on the debt-ceiling issue. The yen is dominating the G10 space this morning after the new BoJ Governor Ueda mentioned that the central bank could drop its yield curve control policy if inflation reaches its 2% goal. Looking at commodities, gold is limping higher but clearly struggling to nurse the deep wounds inflicted by last Friday’s strong NFP report.

US CPI report in focus

After last Friday’s hot jobs report that saw the US economy create 253,000 jobs in April, much attention will be directed towards the pending inflation data for fresh clues on the Fed’s policy path.

It is worth keeping in mind that even though the Fed signaled a pause in further rate increases, it also left the door open to further tightening if incoming data warrants. Traders are currently pricing in a 49% probability of a 25-basis point cut at the September Fed meeting, according to Fed funds futures. CPI year-on-year is expected to rise 5.0% which would be the slowest pace in almost 2 years while core CPI is forecast to cool to 5.5% from the 5.6% in the prior month.

Looking at the technical picture, the Dollar Index (DXY) remains trapped within a range on the daily charts. Resistance can be found around 102.30 while support is at 101.00. A breakout could be on the horizon with the help of a potent catalyst. If prices slip below 101.00, the next level of interest can be found at 100.80. A rebound from 101.00 may trigger a move up towards 102.30.

Currency spotlight – GBPUSD

Could GBPUSD be gearing up for further upside after jumping to a fresh 2023 high on Monday? Well, it looks like bulls are taking a breather ahead of the US CPI data on Wednesday and BoE decision on Thursday. Markets widely expect the BoE to hike interest rates by 25 basis points with much focus on the minutes, quarterly Monetary Policy Report (MPR), and Governor Bailey’s press conference. Looking at the technical picture, GBPUSD could rally to fresh 2023 highs if BoE hawks dominate the scene with key levels of interest found at 1.2730 and 1.2870 where the 200-week SMA resides.

Commodity Spotlight – Gold

Gold drifted higher on Tuesday as investors braced for the US inflation report mid-week. After being whacked by last Friday’s solid US jobs report which raised the odds of the Fed keeping rates higher for longer, the precious metal could sink further if US inflation remains sticky. Such a development may drag gold back below the $2015 level with bears eyeing the psychological $2000. Alternatively, signs of cooling inflation could inject gold bulls with renewed confidence, propelling prices back toward $2045 and 2023 high at $2063.