The main data focus for today is the US CPI print as markets will use it in order to try and time the pace of future US rate hikes. The lower US CPI goes the less likely the Fed will need to hike rates aggressively. Remember, the key driver for US policy right now is trying to cool demand to deal with high prices. If inflation shows a sharp move lower then the USD is vulnerable to a flush lower too as aggressive hike expectations can be unwound.
The markets to watch
Gold and silver have been pressured over the last few weeks due to a strong USD and rising real yields. If US inflation pulls back we could see a sharp move higher in both gold and silver. With the gold/silver ratio high then silver could outshine gold on a rapidly falling USD.
US Indices have been pulling back in expectations of aggressive Fed hikes. Lower earnings, less disposable incomes, and higher mortgage payments are all a by-product of higher US rates. However, if inflation misses then US indices should push higher in relief of easier business conditions and lower debt repayments.
In the FX space, the most straightforward yield play on US rate expectations has been the USDJPY. So, if the inflation print misses then yields should drop and that should drag the USDJPY lower.
So, the print to look for is a headline y/y print below 7.8% and a m/m core reading coming in below -0.2%. Remember that the y/y forecast is for 8.1% which is already below the 8.5% prior. Now, one inflation print will not change the Fed’s mind. However, it will relieve short-term pressure and these are markets to keep an eye on over the print for potential short-term opportunities.