The sustained higher inflation readings expected from the US today will be the markets focused with the probabilities of acceleration towards tightening monetary policy by the Fed. The biggest risk today is that the US CPI disappoints especially after the German CPI rose to a 20+ year high.
Market Brief
Today is an inflation data day, with the US CPI reading being the market's main focus.
We have already received inflation data from Germany, which showed the highest level of CPI since 1993. Destatis reports:
The inflation rate in Germany, measured as the year-on-year change in the consumer price index, stood at +3.8% in July 2021. The inflation rate has thus surged; in June 2021 it had been +2.3%. A higher inflation rate than in July 2021 was last measured in December 1993 (+4.3%). The Federal Statistical Office (Destatis) also reports that consumer prices were up 0.9% on June 2021.
The euro is trading higher against most currencies at the London open with the commodity and safe-haven currencies showing little conviction for either a risk-on or risk-off day. Any trades that do present themselves should have this in mind as the ranges are likely to be quite tight until we get to the US CPI data drop.
One of the leading factors in rising inflation is the prolonged higher prices of energy. US crude oil inventories had an 816,000 draw last week. The American Petroleum Institute (API) also reported oil reserves in Oklahoma's Cushing decreased by 413,000 barrels.
The crude oil contract on the ActivTrader platform has found some decent support and needs to take $68.68 today for the resumption in an uptrend to have any chance of happening, but the real significant resistance will be last Fridays high and the daily ema’s.
Although the day's relative strength in the euro is higher against all currencies bar the US dollar and yuan, the main driver of euro price is the EURUSD. This pair is now trading at the March 2021 swing low and looks set to test the double bottom set in the autumn of 2020 and the 1.1600 level. With US jobs data picking up and inflation metrics sustaining over several months the market is pricing in the higher probability that there will be rate hikes from the Federal Reserve and tapering of assets. Higher inflation is bad for the currency but the yields that will no doubt go higher with a higher interest rate become more attractive to forex money managers, as the European Central Bank will remain dovish for some time. The ECB after policymakers vowed last month to keep interest rates at record-low levels for longer as they try and nail their inflation 2% target.
The Hang Seng, Shanghai Stock Exchange, and Australian ASX all traded a bit higher today and the UK’s FTSE100 has started the London session off positively.
The FSTE100 has been threatening a breakout for the past week and today I would say it has broken out to the upside with a measured move target of 7742 to aim for. The S&P500 and Dow Jones Industrial Average both made new all-time highs on the back of the Infrastructure Bill passing the voting stage at the US Senate
The Aussie looks like it will be the weakest currency today as it is contending with the higher US dollar but also further lockdowns across the main central business districts. The coronavirus lockdown in Melbourne has been extended for another week as the Delta variant causes another spike in infections. It’s hard to get my head around the Australian zero-tolerance policy of covid-19 as they have had 20 new infections, which compared to the UK’s 196,047 positive tests in the last 7 days seems very small. Good luck to them for sure and we can only hope that economically the RBA come out with some supportive measures.
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