Market Mood Fragile Ahead Of US CPI

A sense of deep unease rippled through financial markets on Tuesday as concerns over the global growth outlook and geopolitical threats left investors on edge.

European stocks were painted red this morning amid fears around untamed inflation pushing interest rates higher at the expense of economic growth. US stock futures are pointing to a lower open with the negative momentum and risk-off sentiment infiltrating Wall Street. In the currency space, king dollar continues to draw power from aggressive rate hike bets while sterling remains shaky despite efforts from the Bank of England to support the currency and the vulnerable UK bond market. Oil is weaker thanks to a strong dollar and an outbreak of Covid-19 cases in China, while gold is selling off for a fifth day in a row as traders await Thursday’s US CPI report.

It may be wise to fasten your seatbelts tightly because this will be another busy week for markets. Investors will be served a platter of key economic reports and speeches from various financial heavyweights. Most importantly, all eyes will be on the latest US inflation figures which is now the biggest risk event on the calendar. Later today, the International Monetary Fund (IMF) publishes its World Economic Outlook and will almost certainly revise global growth lower. ECB Chief Economist Philip Lane, Bank of England Governor Andrew Bailey, and Cleveland Fed President Loretta Mester will be under their separate spotlights. Given how financial markets remain highly sensitive to anything relating to inflation or monetary policy, any fresh insight offered by these central bank officials could translate into market volatility.

All eyes on the US inflation report

Most attention will be directed toward the US inflation report on Thursday with investors watching to see if prices are rising again or perhaps finally peaking. According to Bloomberg, the headline print for September is projected at 8.1% from 8.3%, while the core is expected to rise to 6.5% from 6.3% in August. A higher-than-expected CPI figure may reinforce expectations around the Fed unleashing another monetary bazooka in November to tame inflation. This could inject dollar bulls with fresh momentum to steamroll G10 and other currencies. It’s worth keeping in mind that the greenback has had a phenomenal trading year, appreciating against every single major currency. Alternatively, a softer print could reduce aggressive rate hike bets and feed the “dovish pivot” narrative ultimately hitting the dollar. Traders are currently pricing in an 80% probability of a 75-basis point rate hike next month.

Currency spotlight – GBPUSD

Sterling has struggled for direction so far on Tuesday despite the upbeat jobs report soothing concerns over the UK economy. Unemployment hit a fresh multi-decade low at 3.5% in the three months to August from 3.6% in the previous period. This was the lowest level witnessed since February 1947. However, the fall in unemployment was the result of a sharp rise in the number of adults within working age labelled as economically inactive. The focus now shifts toward the BoE Governor Bailey’s speech later today. If he mentions anything relating to inflation, monetary policy, and the ructions in the gilt market, this could translate into pound volatility.

Focusing on the technical picture, GBP is under pressure on the daily charts. An appreciating dollar could drag prices back toward 1.0850 support. Weakness below this point may trigger a selloff towards 1.0520. Alternatively, a break back above 1.1100 has the potential to spark a rally towards 1.1300.

Commodity spotlight - Gold

Where gold concludes this week will most likely be influenced by the US inflation data on Thursday.

A red-hot CPI report will almost certainly reinforce aggressive rate hike bets, ultimately boosting the dollar and Treasury yields at gold’s peril. Such a development may drag the precious metal towards $1655, $1615, and $1600. Alternatively, an inflation report that misses expectations could offer space for gold bulls to fight back, opening a path back toward the psychological $1700 level.