Markets in holding pattern as traders eye US CPI

The first half of today’s session saw the European indices push higher and this weighed on the dollar as the likes of GBP/USD and AUD/USD staged a modest bounced on improved risk sentiment, following last week’s falls. However, there was no fundamental justification for the improved risk appetite, as we haven’t had any major macro data or news. Attention is going to be on US CPI, due to be released on Tuesday, as market participants assess the likelihood of more rate hikes from the Fed beyond the 25 basis point rate hike expected in March.

What has been driving the markets?

Investor sentiment has been boosted in recent months by hopes that inflation has peaked. As a result, we have seen a big upsurge in risk sensitive asset prices in recent months, causing the dollar to slide. However, there was a bit of a pullback in stock prices and the dollar bounced back following the conclusion of key central bank meetings a couple of weeks ago.

Last week, if you remember, all the attention was on a speech by the Fed chair Jerome Powell. Traders were looking for comments from Powell on the much stronger than expected jobs report and whether this meant anything in terms of monetary policy adjustment. As it turned out, Powell caused a bit of volatility, but stuck to the FOMC’s view that the disinflationary process has begun. However, he pointed out that the inflation recovery will be a bumpy road, and that the 517,000 jobs added to the economy in January is evidence of that.

So, he appeased both the bulls and the bears, but ultimately didn’t cause any major shifts in sentiment.

Initially, the market interpreted his comments as being less hawkish than expected, causing stocks to rise and the dollar to fall. Those moves then quickly reversed, as investors realized that he actually wasn’t too dovish. We saw technology stocks head lower again, causing the S&P to close lower on the week. The dollar index finished higher for the second consecutive week.

So, as we transition into the new week, once again the focus is going to be on inflation and central bank speech.

US CPI is the highlight of week’s macro data

Luckily, we have plenty of inflation data to provide us direction. CPI data will come out from both the UK and US, which is likely to be the key macro event of the week.

In addition, we have Australia’s employment report, which should move the Aussie dollar sharply, especially if we see a beat after the RBA provided markets with a hawkish hike last week

But the key macro data is going to be Tuesday’s publication of US CPI. Expectations are for the headline print to fall to 6.2% YoY vs. a previous reading of 6.5% YoY. Core CPI is expected to fall to 5.5% YoY vs a previous reading of 5.7% YoY.

My colleague Matt Weller has a more in depth preview for US CPI, HERE.

So, CPI is expected to continue falling, in line with the recent trend. However, if we see an above-forecast reading, or worse, a reading above last month’s print, then this may lead to a renewed strength in US dollar while stocks may head lower on anticipation of even tighter policy for longer. Inflation needs to be weaker than expected to put any real pressure on the dollar again.

Dollar Index shows bullish price action

The dollar index has started to print bullish price action of late again. It completed another bullish candle last week, adding to the hammer candle that it had formed the week before. A clean break above 103.80 is now needed to trigger fresh technical buying.

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