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Will U.S. inflation report deliver?

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By Craig Erlam  

European equity markets opened cautiously higher on Thursday, following a mixed session in Asia amid nerves around the U.S. inflation release later in the day.

This inflation print has been the main topic of conversation all week. The jobs report last Friday changed the dynamic in the markets and ensured that not only was this CPI report going to be important, but in all likelihood pivotal ahead of next month’s Fed meeting.

We’ve gone from inflation declining, but the labour market being stubbornly tight, to both appearing to sing from the same hymn sheet.

Cracks are appearing in the economy following a very aggressive tightening cycle that’s leading to cooling demand, prices and wage demands. Unemployment remains low as employers have been reluctant to lay people off, but there’s every chance that will follow.

The Fed doesn’t want to be responsible for a needlessly sharp downturn and the lag effect of monetary policy means that is a risk when the central bank is raising rates as aggressively as it has been.

Another good inflation report, particularly on the core side, will give policymakers more than enough reason to slow the pace of tightening further and even lower the terminal rate projections in March, if it continues.

Oil steadies

Oil prices steadied Thursday morning after recovering strongly on Wednesday. Enthusiasm is building in the aftermath of last week’s U.S. jobs report and a positive inflation reading could further fuel that.

The prospect of a softer landing, even avoiding recession, is as good as investors could have realistically hoped for once it became clear how high inflation was going to rise last year.

A softer landing for the U.S., and perhaps elsewhere, combined with a strong economic rebound in China following the current Covid wave could make for a much better year than feared and stimulate extra crude demand.

Of course, this case very much focuses on the promising scenarios, but they are also increasingly looking like the more plausible ones as well.

Gold trading around pivotal technical zone

The gold rally is continuing to stall around $1,880, the lower end of a range that has been a major point of support and resistance.

The range between $1,880 and $1,920 could be pivotal once more, either as a barrier of resistance in the event that inflation disappoints, or a signal of renewed bullishness if a positive report is the catalyst for a break above.

Either way, we could see plenty of volatility in the aftermath of the release.

Bitcoin buoyed by risk recovery

Bitcoin is capitalising on the improvement in risk appetite that we’re seeing in the broader markets, rallying more than 4% on Thursday before paring gains just shy of the December peak.

After weeks of treading water between $16,000 and $17,000, cryptos have been given new life by the U.S. jobs report and the risk rally that has ensued.

Another positive inflation reading on Thursday could see it trading at levels not seen since the early days of the FTX collapse. ​

 

Craig Erlam is Senior Market Analyst, UK & EMEA at OANDA

Opinions are the author’s, not necessarily that of OANDA Global Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. Losses can exceed investments.