(Lukman Otunuga – FXStreet)
Asian shares struggled for direction this morning as concerns about inflation and the outlook for economic growth weighed on sentiment. Overnight, Wall Street’s main indices were mostly flat with a sales warning from Nvidia dragging down the tech sector. In Europe, stocks are expected to open lower due to the growing caution ahead of the US inflation report on Wednesday.
Looking at currencies, king dollar has retreated from recent highs while EUR/USD is trading around the sticky 1.02 level. Gold seems to be waiting for a fresh fundamental spark while oil prices are under pressure as OPEC’s monthly report and EIA data loom.
On the data front, Australian consumer sentiment slumped in August thanks to the horrible combination of soaring inflation, rising interest rates, and gloomy outlook on living costs. This marks the ninth consecutive month that sentiment has stayed negative.
Will US inflation report spark fireworks?
The main risk event and potential market shaker this week will be the latest US inflation figures published on Wednesday. After accelerating by 9.1% in June, markets are forecasting a cooling in July annual inflation to 8.7%. Should expectations match reality, this could be a breath of fresh air for financial markets and fuel optimism around inflation plateauing. Given how markets remain obsessive and incredibly reactive to any topic relating to rising prices, explosive levels of volatility could be on the cards.
If US consumer prices defy market expectations by rising again, this is likely to reinforce expectations around the Fed hiking rates by another 75 basis points in September. According to Bloomberg, traders are currently pricing in this scenario with around a 74% probability.
Alternatively, if the inflation report meets or misses expectations, this could raise hopes over consumer prices peaking. Such a development could encourage the Fed to step back from its aggressive approach toward hiking rates, which could send the dollar tumbling and Treasury yields declining.
Commodity spotlight – Gold
Gold was able to recover from last Friday’s selloff after the strong jobs report cooled recession fears and fortified expectations for more aggressive Fed rate hikes. Bulls wasted little time in clawing back the post-NFP losses yesterday with prices trading around $1785.50 as of writing.
Although buyers have been in the driving seat for the past three weeks, the pending US CPI report could shift the balance of power between bulls and bears. A strong inflation report could deal zero-yielding gold a heavy blow as aggressive rate hike bets jump. Alternatively, a weak report may provide the precious metal an opportunity to push higher.
Looking at things from a technical perspective, there are a couple of tough resistance levels that bulls may face down the road. The first one is around $1785 where the 50-day SMA resides and $1830, a key point just below the 100 and 200-day Simple Moving Average. If bears end up dominating the scene, prices may sink back towards $1752 and $1724.
The revenge of energy stocks [Video]
(Ipek Ozkardeskaya – Swissquote Bank Ltd)
Nvidia shares dived 6.30% yesterday on news that the company missed its revenue projection by $1.4 billion due to slower demand for PCs and gaming. Nvidia pulled other US chipmakers into the negative along with it, and brought the question of whether the chip rally, which was triggered by a $52 billion government help is over.
The dollar index gave back gains following the blowout NFP figures printed on Friday. Investors are confident that inflation in the US may have peaked last month, as the New York Fed’s Survey of Consumer Expectations showed steep drops in inflation expectations in July.
In the FX, the EURUSD is steady around the 1.02 level, waiting for the dollar to soften on ‘good news’ to make a further attempt toward the 1.0350 mark, where stands the 50-DMA. Given that the European Central Bank (ECB) played its biggest cards at last meeting, there is not much upside potential from the ECB standpoint. On the dollar-yen front, traders now call the end of a particularly winning long USDJPY trade this year.