US Inflation Data to Guide Markets

In the meantime, we have Fed Chairman testifying before a Senate committee, and based on the first of his two appearances this week, Powell seems to be leaning further in the direction of monetary policy easing. Cracks in the jobs market and an inflation rate moving closer to the target have allowed the Fed Chairman to now speak about the pitfalls of leaving rates high for too long. It would take a surprising uptick in the inflation data this week to bring November back into the picture as the likely first rate-cutting month (rather than September).

Treasury yields have slid since Friday on the softer US macro-outlook; however, the US Dollar Index (DXY) is proving hard to budge from the 105 level. This is because other currencies are struggling to move higher against the greenback for various reasons. The yen is still pressured by the gulf between yield levels versus the Dollar, while the euro short term upside seems capped by the prospects of political gridlock in France (following the elections on the weekend). Essentially, troubled conditions for other currencies have softened the blow for the USD.

With markets becoming more convinced that a Q3 rate cut from the Fed could be on the way, gold has stepped higher rather than moving ahead in leaps and bounds. Gold is not enjoying quite the same tailwinds from central bank buying as previously, which is making a return to the $2400 level more of a challenge this time around. China’s central bank has effectively taken a leave of absence on the gold-buying front (with no purchases for the last two months), and with no clear roadmap as to when they may resume, gains in the precious metal may not come quite as easily as before. Nonetheless, if we do see tame US inflation prints, gold stands to be one of the assets to potentially benefit. Levels to watch include support at $2352 and $2340, while resistance awaits at $2383 and $2408.

Crude oil has pulled back with the threat of supply disruptions from Tropical Storm Beryl receding. Though Hurricane Season will more than likely pose further supply threats to the Gulf Coast, which could keep the bias tilted to the upside for energy prices. The US WTI contract has slipped from $84 to $81, and investors will be watching crude oil inventory levels to get a feel for how the summer oil demand season is going. Support lies at $80.10, while resistance at $82.50 would need to be overcome first if the WTI contract has its sights on a return to the circa $84 region.

Overall, US inflation figures will set the mood for risk assets this week. While a move lower in headline CPI is expected, the core inflation data could be a different story as this has been a particularly tough nut for the Fed to try and crack.