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US CPI could turn up the heat on the Fed next week

inflation graphic

Yesterday saw a cautious session for markets in Europe, with investors becoming ever more reticent heading into the weekend, particularly since today’s US CPI report for November could well see headline inflation rise to its highest levels since the 1980’s when Ronald Reagan was President of the US.

The risk of tighter restrictions due to Omicron is also tempering risk appetite, after the early gains of earlier in the week, with US markets also closing lower, despite weekly jobless claims falling to another 52 year low of 184k.

As we look ahead to this afternoon's US numbers, European markets are set to open slightly lower, as Asia markets also underwent a similarly cautious session. 

We’ve certainly come a long way since the Omicron inspired meltdown post-Thanksgiving, and while we’ve managed to claw back most of those losses for the most part, there is a concern over the economic cost of further restrictions at a time when central banks are likely to have to be less forthcoming when it comes to monetary policy. This will be a tricky path to navigate especially if CPI surges by more than expected later today.   

With the Federal Reserve due to meet next week, there is some concern that a really hot number today could prompt the FOMC to go accelerate its tapering program more rapidly, from the current $10bn of US treasuries and $5bn of mortgage-backed securities that it started last month, in an attempt to give themselves more optionality in 2022 when it comes to raising rates. Currently markets are pricing the prospect of a doubling of the taper next week, and any number that hints at a bigger amount next week could prompt some choppiness.

In October US CPI hit a 31 year high of 6.2%, with core prices rising to 4.6%. The hope is that this could be the high-water mark when it comes to headline CPI, however when looking at the various ISM reports there has been little sign of that. It has also been notable that a lot of US retailers have been able to pass price increases onto their customers which suggests that CPI could remain sticky well into next year.

Expectations for today’s November CPI are for prices to rise further to 6.8%, however some have suggested we could hit 7%, which would further reinforce the argument for an accelerated pace in tapering. Core CPI is expected to rise to 4.9%.

Before that however we have some UK data including the latest monthly GDP numbers for October, which are expected to show the economy rose by 0.4%, slightly down from the 0.6% in September, with the index of services forecast to contribute to all of that expansion.

Industrial and manufacturing production are expected to pick up after the contractions seen in September. October industrial production is forecast to rise 0.1%, and manufacturing production to rise by 0.2%.   

EUR/USD – failed to follow through towards the 1.1385 area, keeping the pressure on the downside. The key support remains at the November lows at 1.1185, as well as the 1.1160 level. A move through 1.1420 argues for a move back to the 1.1520 level.  

GBP/USD – still holding above the 1.3160 area but the rebounds look feeble. If we hold above this key support, then we can move back higher towards 1.3400. A break of 1.3160 opens up the 1.3000 level. We need to recover back above the 1.3300 level to stabilise and move towards the 1.3500 level.

EUR/GBP – failed at the 0.8600 area slipping back below the 200-day MA yesterday. Support remains at the 0.8480 level and needs to break below this level to diminish the risk of further gains.

USD/JPY – the 114.00 level continues to cap the upside. A breakthrough 114.00 has potential to target the 115.00 area. The 112.50 level still looks fairly solid for now. A move below the 112.50 level targets the 111.80 area.

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