Markets steady as focus turns to possible peak US CPI

Overnight Headlines

*Dollar down but near two-decade highs ahead of US inflation data

*Asian shares inch up from near two-year lows, Wall Street recovers

*WTI crude bounces back from below $100 on economic worries, strong dollar

*China inflation exceeds forecasts as lockdowns roil supplies

USD extended its bullish run and closed higher against most of its G10 peers overnight. DXY edged up to key resistance at 104. EUR slipped for the first time in three sessions, trading in a narrow range. GBP stayed defensive after the outsized drop last Thursday (-2.1%). Cable is still stuck near its lows, just above 1.23. USD/JPY treaded water above 130. AUD remained heavy printing another new swing low at 0.6910 before recovering. USD/CAD pushed up to a high of 1.3052 before retracing back to 1.30.

US equities saw another volatile session. Tech led the rebound with the Nasdaq gaining 1.30%. The S&P500 ticked up 0.25%. The Dow fell for a fourth straight session after alternating between gains and losses. Wall Street’s fear gauge, the VIX, remain elevated above 30. It is quite rare for this to remain at this level for long. US 10-year Treasury yields dipped below 3%. Asian shares are mixed while US futures are firmly in the green.

Day Ahead – Has US CPI peaked?

We get the key release of the week today with the latest US consumer price figures. It is now probably the single most important data for global markets. The headline annual CPI number is expected to fall to 8.1% from the 40-year high of 8.5% in March. Breakeven forecasts for the next five and ten years are also dropping sharply, below the significant 3% level. It will be a major shock if the headline continues to rise.

There will be much focus on the core reading which is forecast to fall to 6.1% from 6.5%. This data excludes food and fuel which continue to be roiled by the Ukraine conflict. Monthly figures have actually dropped in each of the last two months, but economists polled by Bloomberg predict a m/m rise. This does not help the “peak inflation” narrative. Of course, on the flip side markets will take another fall very positively.

Chart of the Day – USD/CAD breaches resistance and 1.30

We wrote yesterday that commodity markets couldn’t escape the broader risk-off move. Markets remain concerned about the China Covid lockdowns, recession risk and rising rates. The CAD has little opportunity to avoid this negative backdrop too. The VIX remains high despite a mild improvement in major equity markets and oil is potentially falling below $100.

Yesterday’s high is at 1.3052 and we are currently trading around 1.30. Bulls need to keep above the prior long-term resistance above 1.29. But a break under 1.2715 is really needed to change the technical picture. Resistance is the 200-week SMA at 1.3040. The next upside target above is 1.3124.

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