Market caution returns on hot US CPI data

Asian shares flashed red on Wednesday along with US futures as investors evaluated sticky American inflation data and remarks from Fed officials. European futures are pointing to a negative open this morning amid the cautious sentiment and this could find its way back to Wall Street later today.

In the currency arena, dollar bulls were injected with some renewed confidence as expectations intensified over interest rates remaining higher for longer than initially anticipated. Gold struggled to keep above $1850 during early trade and could extend losses as expectations shift towards a more hawkish Fed in the near term. Given how the latest red-hot US inflation figures are likely to create some uncertainty over the US economy, caution may remain the name of the game.

Sticky inflation data rekindles rate fears

Buying sentiment towards the dollar slightly improved after the latest US inflation figures printed higher than expected.

The headline consumer price index number climbed 6.4% in January from a year earlier, one-tenth lower than the 6.5% print in December. Although this was higher than the forecast of 6.2%, it was still the lowest reading since October 2021.  The core reading, which excludes volatile items such as food and energy, cooled for the fourth consecutive month to 5.6%. This figure was above market expectations of 5.5% but still, the lowest witnessed since December 2021.

While inflation in the world’s largest economy continues to slow, it's not falling as quickly as investors anticipated – ultimately rekindling Fed rate hike bets. Given how these latest inflation figures add to January’s blowout jobs report, the dollar could edge higher in the short term. However, the bigger picture has not changed with the Fed closer to a peak in rates in the coming few months.

It will be wise to keep a close eye on the US retail sales and industrial production figures released later today. There has been a lot of hype and excitement around the US CPI but the retail sales data may provide fresh insight into consumer behaviour and health of the economy. A strong set of economic data will most likely stimulate expectations around US rates being higher for longer.

On the technical front, the DXY could be gearing up for a breakout above 104.00. Such a move could open the doors towards 105.00. Alternatively, sustained weakness below 104.00 may open a path back toward 102.00.

Commodity spotlight - Gold

After swinging between losses and gains in the previous session, gold kicked off Wednesday on a negative note.

The precious metal is trading below $1850 thanks to the sticky US inflation print and conflicting views from Fed officials. Given how the dollar is likely to draw strength from expectations around the Fed staying hawkish for longer, this could translate into more pain for zero-yielding gold down the road. Buying sentiment towards the precious metal could also take another hit this afternoon if the US retail sales and industrial production data exceed market forecasts.

Focusing on the technical picture, gold is under pressure on the daily charts. A solid daily close under $1850 may open the door toward $1815 and $1800, respectively.

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