The US CPI print will be important this week to see whether the Fed really has reached the end of its hiking cycle. The print that the Fed wants to see is the headline continues to fall and, perhaps, even more importantly, the core reading to fall too. A big miss here and watch out for USD weakness, falling US10Y yields, and a big shove higher for silver and gold.
Headline inflation moving in the right direction
Looking at the chart below you can see that headline inflation has been stepping lower in the right direction. Yes, it is still above the Fed’s 2% target, but still moving in the right direction.
Core proving stickier
The core reading excludes the volatile food and energy components. However, the core reading is proving stickier. This is a pattern repeated across many of the major countries.
What to look for
If the headline print comes in below 4.5% and the core below 4.9% then the market will take that as confirmation that the Fed is winning the inflation battle. This could mean a lower USD, lower US10 yields, EURUSD upside, and precious metal upside.
If the headline print comes above 6% and the core above 5.7% then markets will read that as the Fed needs more to fight inflation. This could result in USD upside, higher US10y yields, EURUSD downside, and precious metals downside (although it would not be unreasonable to expect dip buyers in gold and silver).
Finally, watch out for other US banking fears to re-emerge. If it happens then it would be possible to see USD strength on risk-off flows which would invalidate the outlook above.