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All eyes on US CPI; is Fed done with rate hikes?

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By Craig Erlam  

It’s been a positive start to trading on Thursday, with European stocks up around 1% and US futures not far behind.

Whether that will last to the end of the session may depend on the US CPI inflation report, which is released shortly before the opening bell on Wall Street. It will take something big for the Federal Reserve to consider hiking again, having shifted to a more gradual approach in recent months.

To hike again in September could alarm investors and suggest the central bank has a lot more to do, which wouldn’t really be consistent with headline inflation around 3% and core below 5%. A big spike in these, particularly the latter, could make investors nervous, but it would need to be substantial to even consider raising again next month.

Another promising report, especially one that sees a beat on headline and core again, could see enthusiasm spread throughout the markets once more. Especially if the headline number slips below 3% which, from a psychological perspective could be a big moment.

Suddenly the 2% target feels within reach, although in reality core running around 5% would indicate that’s not sustainable.

Momentum wanes as oil trades around 2023 highs

Oil prices have stabilised again Thursday after another choppy, albeit broadly bullish, start to the week.

They’re now trading around their highest levels for the year. You have to wonder whether the recent announcements from Saudi Arabia and Russia, combined with better economic prospects, will be enough to lift the price to new 2023 highs, and above $90 in the case of Brent.

The rally of the last couple of weeks has been accompanied by dwindling momentum. While not necessarily a bearish indicator in itself, it suggests we may be seeing some profit-taking on approach to those highs and ahead of the CPI report.

That could change after the release if we see a really promising report, but for now, that divergence is undoubtedly a red flag.

Gold sell-off stalls ahead of June lows

Gold appears to be stabilising ahead of the US CPI report, with traders paying close attention to the outcome as it could determine whether the yellow metal breaks the June lows or rebounds higher.

Prices have been pressured by rising yields and a stronger dollar recently as traders have pushed back expectations around rate cuts for next year. While they appear confident that the Fed is done with tightening – for now – they’re less sure we’ll see the kind of easing that they were so convinced of earlier in the year.

Another promising CPI release could change that and so Thursday really is quite significant.

There’s still a long way to go, but the US has made significant progress, even at the core level, and more is expected over the rest of the year. If it can do so at a more accelerated rate than currently envisaged then gold could prosper.

 

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.