The big focus for FX markets is inflation and how the Fed will react Tomorrow 10/06 we have CPI data out of the US and it has the potential to create significant volatility in the markets. If CPI data comes in strong and above forecast, this could result in a broad-based USD rally.
Nordea’s research against the majority view sees inflation printing higher and above forecast with core inflation at 4%, above forecasts for 3.4%, and headline inflation at 6% above market expectations for a reading of 4.5%.
Federal Reserve members, continue to soothe the market with the word “transitory” but they have been saying this for months and inflation has been accelerating the upside. If we get an upside surprise in inflation, this will force the Fed to act and bring forward bond tapering which the market is not expecting and the market is heavily short the USD.
In terms of inflation: “Unprecedented level of stimulus plus other forms to support spending” floating around the economy. A combination of helicopter drops by the federal government and supply chain disruptions resulted in the quickest “V-shaped” recovery that ultimately sparked supply constraints, driving up prices.” (Nathan Sheets PGIM Fixed Income& former under-secretary at the US Treasury) He’s right – In terms of inflation not being transitory the chart below clearly shows the US spike in inflation v other countries.
The main drivers of core inflation and an upside surprise are used cars and shelter prices
Inflation pressure is broad-based and we have seen a huge rise in commodity prices in the last year
Trading The News
In terms of inflation the 10 Year Note is trading at support and on an upside suprise in terms of CPI we would expect it to rise….
The DXY is trading not far from daily chart lows but an upside breakout if it does occur should follow through strongly to the upside.
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