The US dollar is mixed to start the North American session, with the greenback higher versus the EUR, GBP, CHF and CAD, but lower versus the JPY, AUD and NZD.
The largest moves are against the commodity currencies, with the NZD up 0.45% and the AUD up 0.27% versus the dollar. The USD is also down 0.29% versus the JPY. Conversely, the dollar is up 0.34% versus the CHF and 0.20% versus the CAD. The EUR and GBP are only modestly lower.
The ranges for the three major currency pairs remain relatively contained ahead of the US CPI report:
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EURUSD: 1.1592, with a range of 1.1591 to 1.1617
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USDJPY: 153.97, with a range of 153.92 to 154.61
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GBPUSD: 1.3506, with a range of 1.3496 to 1.3526
In the Kickstart video, I take a technical look at the EURUSD, USDJPY and GBPUSD and outline the key levels that would give buyers or sellers more control following the CPI report.
US CPI takes center stage
The August US CPI report will be released at 8:30 AM ET. Expectations are for:
- Headline CPI MoM: +0.4% versus +0.1% previously
- Headline CPI YoY: +3.4% versus +3.4% previously
- Core CPI MoM: +0.2% versus +0.2% previously
- Core CPI YoY: +2.4% versus +2.5% previously
The headline monthly number is expected to accelerate sharply to 0.4%, largely reflecting the rise in energy prices. However, energy prices can be volatile. As a result, traders will also focus closely on core inflation, which excludes food and energy.
The core reading can provide a better indication of whether inflation is becoming embedded in the broader economy. Within the report, shelter costs and service-sector inflation will be watched closely. If those categories remain elevated, the Federal Reserve may have a more difficult time becoming comfortable that inflation is moving sustainably toward its 2% target.
Yesterday’s PPI report came in close to expectations on a monthly basis, but the year-over-year numbers remained elevated. That puts even more focus on today’s CPI data. Another firm inflation report could reinforce the idea that the Fed needs to maintain a tighter policy stance—or potentially consider another rate increase.
For traders, the first reaction will likely be seen in Treasury yields. A hotter-than-expected report would normally push yields and the US dollar higher while putting pressure on stocks. A softer report would likely take some pressure off yields, weaken the dollar and provide additional support for equities.
There can be some nuance, however. A stronger headline number driven almost entirely by energy may not generate the same reaction as a broad increase in core prices. The market will look beyond the headline and examine the details before deciding whether the initial move is justified.
US yields remain elevated
Treasury yields are mostly higher, led by the shorter end of the curve, following yesterday’s sharp run to the upside:
- 2-year yield: 4.570%, +2.0 basis points
- 5-year yield: 4.744%, +1.1 basis points
- 10-year yield: 4.951%, +0.7 basis points
- 30-year yield: 5.358%, −0.3 basis points
The shorter end of the yield curve is more sensitive to expectations for Federal Reserve policy. Therefore, the larger gains in the 2-year and 5-year yields suggest that traders remain concerned about the possibility that inflation will keep the Fed tighter for longer.
The 10-year yield remains just below the psychologically important 5.00% level. Round numbers often attract additional attention because they can serve as natural decision points for traders. A sustained move above 5.00% could create another headwind for stocks and increase support for the dollar. Conversely, a move away from that level following a softer CPI report could provide some relief across markets.
Higher yields can help the dollar because they increase the potential return on dollar-denominated assets. However, if yields rise too quickly, they can also hurt risk sentiment and create more volatile—and sometimes conflicting—moves across the currency market.
US stocks attempt to rebound
US stock futures are pointing to a higher opening after four consecutive days of declines. A snapshot of the major index projections currently shows:
- Dow industrial average: +260 points
- S&P index: +40 points
- Nasdaq index: +176 points
The rebound is encouraging for buyers, but it comes before the CPI report. Consequently, the futures gains remain vulnerable to a change in inflation and interest-rate expectations.
Higher yields increase the discount rate used to value future corporate earnings. That can be particularly challenging for technology and other growth companies, where a greater portion of the expected value is based on profits further into the future. That helps explain why the Nasdaq can be especially sensitive to sharp moves in Treasury yields.
A softer CPI report could allow buyers to build on the rebound. A hotter report, combined with a move in the 10-year yield above 5.00%, could quickly put the broader indices back under pressure. After four consecutive days of declines, both buyers and sellers will be looking for confirmation from the price action after the data.
Middle East tensions remain a major market risk
Middle East developments continue to center on oil supplies and the security of key shipping routes. Iran-backed Houthi forces have reportedly advanced near the Bab el-Mandeb Strait, while attacks on Saudi energy infrastructure have disrupted production and exports. The IEA said Saudi crude supply fell sharply in August and warned that delays in restoring normal Gulf flows could widen the global supply shortfall.
The Bab el-Mandeb Strait is important because it connects the Red Sea with the Gulf of Aden and serves as a major route for energy shipments and global trade. Any disruption can force vessels to take longer and more expensive routes, increasing transportation costs and delaying deliveries.
There is some hope that diplomatic discussions between Iran and Gulf countries could ease tensions surrounding the Strait of Hormuz. That prospect, combined with profit-taking following the recent surge, is helping oil prices retreat today.
October crude oil futures are down $2.80, or 2.72%, at $99.71. The price has moved back below the $100 level after reaching a high of $104.46 yesterday.
The decline provides some relief, but one day of lower prices does not eliminate the underlying supply risks. Any new attack on production facilities, pipelines or shipping lanes could quickly reverse the move. Conversely, signs of meaningful diplomatic progress could remove some of the geopolitical risk premium that has been built into oil prices.
Oil is also important for the inflation outlook. Higher crude prices eventually feed into gasoline, transportation and production costs. Those increases can then spread through the economy as businesses attempt to pass their higher costs on to consumers. That connection between oil and inflation is one reason the Middle East news, CPI report, Treasury yields and Federal Reserve outlook are all linked in today’s trading.
Elsewhere, gold is up 0.29%, silver is up 0.35%, and bitcoin is trading near $76,900, up around 0.49%. Gold is holding onto a modest gain despite elevated yields, while bitcoin is benefiting from the improved tone in equity futures.
This article was written by Greg Michalowski at investinglive.com.