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Traders await red-hot US CPI and some hoped-for volatility

Summer markets historically mean low volumes and quiet flows.

Traders are on vacation and risk taking is in first gear until trading desks are fully manned again in September. Lower volatility is traditionally the name of the game but that could be about to change with today’s release of the latest US inflation data.

This is arguably the major event on the risk calendar and is expected to show some moderation in the headline print in July.

But price pressures still abound and are way above the Fed’s 2% target. That means central bankers should remain in rate hiking mode until the end of the year.

Economists forecast a drop in annual inflation to 8.7% last month from 9.1% in June.

Monthly consumer price growth is expected to have fallen to 0.2% in July, which would be the smallest advance since the start of 2021. The relief from soaring gasoline prices should be palpable in the headline prints but it is a different story for the core numbers, which strip out the volatile energy and food components. Consensus forecast core price pressures to remain firm. Core CPI is expected to fall only modestly to a monthly rate of 0.5% from 0.7% in June. The annual rate for consumer price growth is projected to rise to 6.0% form 5.9%. Housing costs and rental inflation especially, remain upside risk to the core numbers, while travel -related categories like hotel accommodation are often volatile.

The inflation data will impact thinking around the latest employment data out of the US which reaffirmed any talk of a dovish pivot by the Fed being premature. Indeed, the NFP probably heightened their preference to further front-load rate hikes until the policy rate overshoots neutral by a decent margin into year-end. The chances of a 75-basis point rate hike are now around 77% according to Fed Funds futures.

A higher-than-expected CPI print will lead to another round of hawkish Fed rate hike expectations.

This should prompt another leg higher in the dollar. It could also shift investors towards value stocks like financials.

On the flip side, lower core numbers especially, could see high quality growth stocks and risk taking continue their upward march. The greenback could sell off in this scenario as the Fed backs away from jumbo-sized rate rises.

 

EUR/USD tracks sideways

The world’s most popular currency pair is stuck in a rut.

The range over the last 15 trading sessions has been more or less between 1.01 and 1.03. We haven’t had a lot of market moving news in Europe, with Moody’s recent downgrade of Italy’s sovereign outlook not troubling those levels.

The more we trade and consolidate in a tight range, the more explosive the breakout generally will be.

Though EURUSD has been supported by its 21-day simple moving average (SMA) over recent sessions, parity still beckons on the downside while 1.035 is major resistance above.

Traders await red-hot US CPI and some hoped-for volatility

 

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