UPCOMING EVENTS:
Tuesday: US CPI
Last week we saw some messy and ranging price action in the major currency pairs. The USD gained in the beginning of the week, only to give it back at the end of it. The major events were the US ISM Services PMI and some FedSpeak. The former surprised with an overall good-looking report and the prices paid component didn’t help much as it remained high, while the latter pretty much sealed a 75 bps hike coming at the September meeting with more Fed members leaning for the bigger move. In fact, the market now sees a 91% probability for a 75 bps hike. The FOMC is in blackout period since last Saturday.
The only thing that can change this expectation is the US CPI report coming this week on Tuesday. Nothing else will matter. The CPI M/M figure is expected to show a negative reading at -0.1%, which would be the first M/M decline in two years thanks to cooling energy prices. The Core M/M though is expected to show a 0.4% increase. The CPI Y/Y is expected to show a deceleration to 8.1% and the Core reading to remain unchanged at 5.9%.
Needless to say, that a beat on expectations should result in risk aversion in the market with the USD bid as the Fed may be even less inclined to pause early its tightening cycle due to the fear of being wrong. A miss on expectations should see a risk rally and USD under pressure as the market may bring forward expectations of an earlier than expected pause and subsequent cutting cycle.
A CPI miss should also reprice the market expectations for a 75 bps hike at the September meeting and bring it to a 50/50 split or even a higher probability of a 50 bps. This will make the September FOMC rate decision very interesting because if they follow yet again market consensus, financial conditions may ease again and probably even faster than they would like, but if they want to show once and for all that they are not “joking”, they may hike by an out of consensus 75 bps and trigger a sell-off in risk.
This article was written by Giuseppe Dellamotta.
