Home Forex All eyes on US inflation report: What to expect?

All eyes on US inflation report: What to expect?

by SuperiorInvest

The week began on a positive note on this side of the Atlantic Ocean and on a mixed note on the American side. Stocks in Europe got better deals on Monday, boosted by luxury stocks like LVMH, for example, which added 14 points to the index after Hermes hit an all-time high last week on the back of its strong quarterly results.

Dutchman Adyen extended gains following last week's results, adding around 34 points to the Stoxx, while Arm holdings rose another 30% on Monday, after jumping more than 50% immediately after publishing its own results quarterly. All this to tell you that the rally in the European and US stock markets is somehow offset by a strong market reaction to encouraging corporate results.

But some of it is supported by the rate outlook. And the outlook on rates is becoming slippery, as each Federal Reserve (Fed) official adds his or her pinch of hawkish stance to the mix. Yesterday, the Fed's Michelle Bowman said rates are in a good place to keep pressure on inflation and there is no need to lower rates anytime soon. Similarly, Thomas Barkin of the Richmond Fed said they are “getting closer to inflation” but “are not there yet.”

That said, the New York Fed's latest inflation survey was a nice surprise. One- and five-year inflation expectations were unchanged from the previous month, but three-year inflation expectations fell to the lowest level on record, at 2.35%. That's what the Federal Reserve is working so hard to achieve. Inflation expectations are very important to keep actual inflation figures under control.

Therefore, encouraging inflation expectations give hope that the Federal Reserve will begin cutting rates despite strong growth and spending. However, the expectation of five rate cuts from the Federal Reserve is no longer the base case; Investors now see four rate cuts as more likely, with the first cut priced at nearly 50-50 by May, and almost entirely by June.

These odds could change today, one way or another, with the latest inflation update. Headline inflation in the US is expected to fall below 3% in January, and core inflation is expected to decline to 3.7%. A set of weaker-than-expected data will likely boost May rate cut expectations, keep the dollar index below the 100-day moving average and support stocks.

However, an unwanted bullish surprise should further dent May cut expectations and shift focus to June. In this case, we could finally see the thick 100-DMA bids being pierced and some profit taking at the .

Raw Eyes 200-DMA

American consolidates gains above $77bp and is preparing to test the 200-DMA to the upside. Trend and momentum indicators support a move above this level. Aramco says it sees strong global oil demand this year; OPEC and the IEA will publish their own predictions today and Thursday, respectively.

Of course, OPEC's predictions can be expected to be more optimistic than reality – because they have every interest in the world in boosting oil prices – but strong US growth and decent Chinese stimulus are certainly positive for the dynamics of supply and demand.

However, it must be kept in mind that rising oil prices are a double-edged sword. Good growth is positive for oil prices, but higher oil prices are not good for easing inflation. Therefore, any U-turn in inflation would cause major central banks to tighten their finances further, impact growth prospects and trigger a potential oil rally. In conclusion, a rally above $80 per trillion could be difficult to sustain if the Chinese stimulus plan fails to gain traction.

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