US CPI And FOMC Minutes

With the strong dollar posing headwinds for major US firms and rates getting near neutral, attention is now on when the Fed will ease back on the throttle.
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Wages plus inflation

After the release of NFP data last Friday, the percentage of economists expecting a 75bps rate hike at the next meeting went from 3-out-of-4 to 4-out-of-5. The remainder expects only 50bps as market bulls try to make a case for the Fed to take a step back as we near the end of the year. With unemployment taking a two-decimal drop, only inflation figures remain a crucial data point that could swing market expectations.

Before the Fed releases the minutes from the last meeting on Wednesday, the focus will be on the discussion, if any, about bringing one of the steepest rate hike paths in history to a close. After the meeting, Powell said that rates were expected to remain high, even after reaching the neutral level, repeated in the dot-plot matrix. But, a market rebound is expected to be supported by the Fed cutting rates in the near future. Any potential commentary on this so-called "pivot" would likely help the markets. Meanwhile, it appears as if the consensus is full steam ahead with the hikes.

The CPI focus is on the core

All eyes are on Thursday's CPI figure, which is expected to repeat a pattern observed for the last three months: Headline inflation descends, but core inflation increases. Although the media will talk about lower inflation, because the Fed cares more about core CPI, this will likely affirm the case for a more prominent rate hike.

Core CPI is expected to accelerate to 6.5% from 6.3% prior. This could boost the stock market and weaken the dollar if it were to turn around for an unexpected reason.

EUR/USD can’t get past parity

The 50-day average stopped the EUR/USD rally from the low of $0.9535 at $1.0000 before the RSI reached overbought territories. The pullback has already retested the golden ratio of the upward leg at $0.9700. If the 61.8% Fibonacci is lost, the 78.6% at $0.9630 is the next support above the crucial swing low.

In the event sentiment remains downward below 50% at $0.9765, bears will be on their toes. Bearish bias might pave the way to the extensions of $0.9360 and $0.9250 if a breakdow ensues. Inversely, regaining control of 50% will open the door towards parity once the 50-day SMA at $0.9923 gives in, presuming the interim resistances at $0.9820 and $0.9885 trigger little to no selling pressure. Only breaking past parity could offer bulls some respite, but without rising beyond $1.0170 and $1.0280, bears might step in again.

Key takeaways

Last Friday, the release of NFP data caused the percentage of economists expecting a 75bps rate hike at the next meeting to increase from 3/4 to 4/5. After unemployment, most analysts expecting 50bps will focus on Thursday's CPI as it can be the only data point to stop Fed aggression unless the minutes indicate discussions of a "pivot". Inflation is expected to slow down but core to increase, affirming the case for a more prominent rate hike.