What are the risks heading into the US CPI report later?
It's all about the Fed pricing over the next few days
As it stands, Fed fund futures are still pricing in around a ~80% (78.3% to be exact) probability of a rate cut by the Fed in its 31 July meeting. That shows that any risks heading into US economic releases will be skewed towards the upside instead as markets are so pessimistic that they're expecting more bad news to solidify their current assessment.
The expectation for the report later is that headline inflation is expected to soften slightly to +1.9% y/y from +2.0% y/y in April. Meanwhile, the core inflation reading is expected to hold steady at +2.1% y/y.
As such, a reading that falls roughly within expectations should do little to move the needle considering how much markets are already positioning on the Fed's future policy decisions. However, a notable beat could see some repricing/pullback in expectations though and help the dollar though I reckon that'll only be a short-term reprieve.
In my view, the more crucial data this week will be the retail sales data on Friday. But despite the risks being skewed to the upside for US data, the current pricing also still suggests that there's still some room to squeeze in bets before a Fed rate cut gets fully priced in. Hence, any majorly bad data points will still have the potential to hurt the dollar and Treasury yields further during the week.