Cautious Optimism Ahead of US CPI Today But Plenty Of Downside Risk For Markets

Markets turn their attention today to the November US CPI reading. This will be a major determinant of the Fed’s likely outlook on rates tomorrow with a strong reading seen increasing the chances that the Fed stresses the need to keep pushing for longer with rate hikes, sending risk assets tumbling and driving USD higher. Alternatively, a consensus or weaker reading today should cement the idea of a Fed pivot, allowing the Fed to strike a more neutral outlook on rates and celebrate some of the CPI cooling seen so far. Ahead of the release USD is trading in a muted fashion while stocks are continuing to climb, extending yesterday’s gains, suggesting some tentative optimism that prices will have cooled once more from the prior month’s 7.7% headline reading.

Key Factors for Today

• USD softer ahead of CPI data today – market looking for 7.3% headline down from 7.7% prior
• Mixed action in equities – FTSE under pressure following weak UK data
• Risk FX bouncing back – AUD leads the way
• UK data comes in weak – wages rise and unemployment ticks higher
• Oil and metals holding onto gains ahead of US CPI

Coming Up

• GBP – BOE Financial Stability Report
• USD – November CPI
• AUD – RBA’s Lowe speaks

Mixed Action In Equities As Traders Await US CPI

Equities were seen rebounding higher yesterday despite some initial weakness across the European open on Monday. Muted action in USD and some creeping optimism ahead of today’s US CPI release is helping lift sentiment among stock traders. Gains were seen most in US and Asian equities, though the Nikkei has since come back under pressure today. FTSE too has been lower again as traders brace for higher UK rates with the risk too that the BOE hikes above market forecasts. DAX is seen striking a more neutral tone with choppy price action yesterday though the index managed to hold onto mild gains across the session.

Risk FX Bounces Back – For Now

In FX, the softer tone to USD action across the European open is allowing for a rebound in higher-yielding currencies like AUD and NZD. Today’s US CPI release will be key for prices action with risk currencies looking for a weaker reading to help lift sentiment. The market is looking for 7.3% on the headline reading down from 7.7% prior which, if seen, should see USD head lower into tomorrow’s FOMC.

UK Wages & Unemployment Rise

GBP is still performing well on Tuesday. The latest econ data today shows that UK wages rose to 6.1% in the three months through October, up from 6% prior while the unemployment rate ticked higher to 3.7% from 3.6% prior. On the back of yesterday’s GDP data which showed growth fell 0.3% over the same period, traders are expecting a gloomy outlook from the BOE when it meets on Thursday.

Metals & Crude Mildly Higher Ahead of US Inflation

In the metals and commodities space, both gold and silver are holding near highs as traders await today’s US inflation reading and the Fed tomorrow. Both metals still look poised for further upside so are subject to sharp downside risks on any inflation upset today.  Crude oil is creeping higher again today with crude futures yesterday managing to avoid plumbing fresh lows and turning higher as risk sentiment improved a little. Plenty of two-way risk into today’s US data, however.