Sentiment positive ahead of US inflation report

Asian shares rose on Tuesday, tracking the positive overnight cues from Wall Street as investors turned cautiously optimistic over the highly anticipated US inflation report. In Europe, stock futures point to a mixed open along with US markets, despite the recent positive market sentiment. Easing oil prices have injected financial markets with a sense of optimism that inflation may slow in the United States, resulting in less aggressive rate hikes from the Federal Reserve.

In the currency space, the dollar stumbled into the week despite the recent hawkish comments from Fed officials including Jerome Powell. Oil prices remained gripped by global demand concerns while gold drew inspiration from a weaker dollar but still found upside capped by rate hike bets.

Time for USD bulls to rest?

After kicking off the week in a depressed fashion, the dollar could find itself exposed to further losses.

Fed hawks are clearly in the building and strong US economic data continues to stimulate expectations around the Fed not slowing the pace of hikes anytime soon. However, US benchmark inflation likely slowed for a second month in August thanks to falling gas prices. Markets are forecasting headline CPI to have cooled in August to 8% compared with the 8.5% witnessed in July. The core reading may give a truer picture of where price pressures are heading and the risks ahead. This is expected to move higher with the annual rate rising to 6.1% from 5.9%. While the drop in the headline may not be enough to derail the Fed from raising rates by 75 basis points for the third time in 2022, it may impact future policy meetings. The peak in the Fed funds rate has hit 4% in early 2023, a cycle high.

Other key US reports that may influence the dollar this week will be the initial jobless claims, August retail sales, and industrial production figures among others. A strong set of figures may reinforce aggressive rate hike bets which could support the dollar, while a negative set of reports could dampen expectations around more super-sized hikes, dragging the greenback lower.

Currency spotlight – GBPUSD

The path ahead remains rocky and uncertain for the British Pound.

Uncertainty over the UK’s economic outlook, the Bank of England’s game plan, and direction from the Conservative government will most likely influence the currency’s outlook. Yesterday, there was a barrage of UK data including GDP and industrial production, which offered some insight into the UK economy.

The British economy expanded by 0.2% in July month-on-month, rebounding from a 0.6% fall in June, but this was still below the market forecast of 0.4%. Year-on-year, GDP grew by 2.3% in July which was higher than the 1.9% seen in June but still below the market forecast of 2.6%.

Today, jobs data released was largely in line with analyst estimates and continued to confirm that the UK jobs market remains tight. Unemployment fell to its lowest rate since the early 1970s this summer even as the economy stalled. Importantly, wage growth was buoyant pointing to more aggressive tightening by the Bank of England. Money markets are currently predicting a 73% probability of a 75-basis point rate hike by the bank at next week’s rearranged meeting.

Prices in GBPUSD remain under pressure on the daily charts despite the current bounce. Should 1.1750 prove to be reliable resistance, the major could resume its downtrend ahead of the bank’s policy meeting on Thursday 22 September.

Commodity spotlight – Gold

Gold’s near-term outlook will most likely be heavily influenced by the US inflation report this afternoon.

As highlighted earlier, US inflation is expected to cool for a second consecutive month. If such an outcome results in a weaker dollar and reduced hike bets, zero-yielding gold could shine back towards $1740 where the 50-day SMA resides. Alternatively, an upside surprise in US inflation could see gold tanking like a house of cards as aggressive rate hike expectations beyond September mount. There is strong support around $1700.

Stocks USD GBPUSD inflation Federal Reserve Gold CPI Fed rate hike