Expectation for another positive surprise in US inflation data

At Wednesday's session there was a high appetite for risk. As a consequence, stock markets in the US and Europe gained again. The increases on Wall Street were greater than those on the Old Continent. Nasdaq closed the day with a gain of 1,76 percent. and DAX continued the good streak started with the arrival of the new year and grew by another 1,17 percent. US debt yields were "climbing" to higher levels and the dollar was still in a short-term consolidation. Investors are waiting for today's US inflation reading.

Corrected move north

For the markets at this point the main topic is the US CPI reading for December. The Bloomberg consensus assumes another drop to 6,5 percent. from 7,1 percent. and a decline in the base index to 5,7 percent. from 6 percent Quietly, market participants are counting on another surprise with a lower value, as was the case during previous publications. Unfortunately, we cannot be 100% positive again. sure, although a decline is quite likely. He will be assisted by base effect.

The last two readings - for October and November - resulted in positive market reactionsafter which stocks rose and the dollar depreciated. The market wants to receive another optimistic news, because it has been used to it in recent months. Therefore, I believe that the bar has been set high, with the risk of some disappointment.

For EUR / USD waiting for an impulse to "exit" above the 1,0760 level. The round ceiling of 1,08 also seems to be crucial - where the March lows and the May 2022 peak run. Let us remind you that the October reading made the quotes of the main currency pair definitely beat the parity level and in the next session the exchange rate was over 3,5 figures higher.

The November result presented on December 13 also weakened the USD, but the volatility was not so impressive and in the days following the publication, the quotations largely corrected the move to the north. We are now under horizontal resistance. On the weekly interval, almost the same rising candles have been "painted" on the chart for a long time (with a few exceptions), which also leads to the assumption that we are close to the beginning of the technical correction.

Data key to Fed decision

The market is no longer sensitive to the words of individual Fed officials. After the recent hawkish statements of Mary Daly and Raphael Bostic, there was no major reaction. Only Powell, without saying anything specific in Stockholm, somewhat pleased Wall Street. Yesterday's words of Susan Collins, who announced that she was willing to raise interest rates by a quarter of a percentage point at the next Fed meeting on February 1, also went unnoticed.

She also added that "slow adjustment gives you more time to evaluate the incoming data before making any decision. Smaller changes give us more flexibility.” Collins also advocated raising interest rates to just above 5 percent. this year, potentially in three moves by a quarter of a percentage point, and then holding them until the end of the year.

The representatives of the Federal Reserve have not yet been able to convince the market that restrictive monetary policy will be in force for a longer period of time and it is still visible that futures contracts on the future interest rate in the US are pricing in reductions in the cost of money in the second half of the year - which is justified as a possible response of the central bank to a deepening recession. The Fed sees a decline in inflation, but sees no reason to believe that price pressures are actually declining permanently. The labor market is still very strong, although wage growth has slightly slowed down.

Today's data will probably be the key to the Fed's next interest rate decision, which will be made on February 1. The development of inflation in the future is still a subject subject to high uncertainty risk, which is reflected by a large discrepancy between the expectations of the market and the Federal Reserve.

Source: Łukasz Zembik, OANDA TMS Brokers