Mixed Trade As Focus Turns To US CPI & Fed Minutes

Most Asian stocks struggled for direction on Wednesday as investors turned cautious ahead of key U.S inflation data that may impact the Fed’s monetary policy path. European and US equity futures are both pointing to a mixed open in what feels like the calm before a potential storm. In the currency space, the dollar edged lower this morning weakening against almost every single G10 currency excluding the Japanese yen. Gold prices jumped over 0.7% during early trade while oil prices were mostly steady, holding near their highest close since January.

It is safe to say that markets are waiting for the pending US inflation data before making the next big move. Minutes from the Federal Reserve’s March policy meeting are also due to be released this evening, which could offer further clarity about the Fed’s 25-basis point hike after the collapse of Silicon Valley Bank and general banking fears that rattled financial markets.

Spotlight on US CPI Data

Today’s big event and potential market shaker will be the latest US inflation data. US headline CPI is forecast to slow to 5.2% in March compared to the 6% witnessed in February with the key core monthly reading expected to cool modestly but remain elevated. Traders are currently pricing in a 70% probability of a 25-basis point rate hike in May, according to Fed funds futures with today’s inflation data expected to reinforce these bets. Ultimately further evidence of US inflation slowing could fuel the disinflation story that Fed Chair Jerome Powell has talked about recently, sending the dollar lower. Alternatively, stubborn core figures may dampen expectations around the Fed pausing its policy tightening anytime soon, which could offer support to dollar bulls.

A few hours after the US inflation data, the focus will shift to the FOMC minutes. Investors will closely scrutinise the language and whether any fresh clues are offered on future Fed rate moves. If the minutes strike a dovish tone similar to the March meeting decision, this could reinforce market expectations around the Fed's hiking cycle nearing an end.

Regarding the technical picture, the Dollar Index (DXY) remains in a downtrend on the daily chart. There have been consistent lower lows and lowers highs while the MACD trades below zero. A strong move back below 102.00 could encourage a decline towards this month’s low. Should prices stay above 102.00, this may signal a move back towards 102.80 and 103.30, respectively.

Bank of Canada to keep rates steady

The Bank of Canada (BoC) is expected to keep interest rates unchanged at 4.5% for a second straight meeting. The annual inflation rate in Canada continues to show signs of cooling, falling sharply to 5.2% in February compared to 5.9% in the previous month. However, some economic data has surprised to the upside with the job market still piping hot and wage pressures strong. Much attention will be directed towards the BoC's updated forecasts and Governor Mackem’s word for fresh clues on the central bank's policy path. Looking at the technical picture, USDCAD could be injected with fresh volatility due to the BoC meeting, US CPI, and Fed minutes. Prices are under pressure on the daily chart and may descend towards the 200-day SMA around 1.3395.

Commodity Spotlight – Gold

Gold prices extended gains on Wednesday morning, finding comfort above $2000 as caution reigned ahead of the US inflation data.

The precious metal continues to draw strength from a weaker dollar despite last Friday’s jobs report boosting expectations for one more Fed rate hike. Despite the positive performance this week, everything could come crashing down for gold if the US inflation figures exceed market expectations. Expect the precious metal to also be influenced by the FOMC minutes which could provide clues on future Fed moves. Talking technicals, prices remain bullish on the daily charts and could be heading toward the $2032 recent high. Beyond this point, the next levels of interest are $2070 and the all-time high at $2075.47. Should prices slip back under $2000, gold could retest $1950 and $1900, respectively.

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