US CPI On Watch 

Today’s US inflation reading comes at an interesting time for the market. Against a backdrop of the ongoing debt ceiling standoff, USD has stagnated in recent sessions. Indeed, looking at the DXY chart we can see that the Dollar has been stuck around current levels for the last 5 weeks, during which time speculative USD short positioning has increased sharply. With this in mind, conditions are ripe for a short squeeze higher in USD. Might today’s US CPI provide the catalyst for such a move?

Upside Inflation Risks 

Looking at the forecasts for today, the market is looking for monthly headline CPI to rise to 0.4% from 0.1% prior and core to fall slightly to 0.3% from 0.4% prior. On the annual reading, the forecast is for an unchanged 5% print. On the back of a bumper set of US labour data last week, however, there are upside risks. Wages growth came in above forecasts last week while the unemployment rate was seen dropping, suggesting plenty of upside pressure. Should today’s US CPI readings come in above forecasts, alongside Friday’s data, this will likely increase the market view that the Fed will push for one further hike in June as per its data-dependent guidance.

Market Impact 

In this scenario, stocks will be seen falling back near-term while USD spikes higher. Late speculative shorts will be quickly exiting their USD positions, fuelling the move. In terms of stocks, tech stocks will likely see the most downside action while defensive blue-chip stocks (Dow Jones) should hold up better.

Technical Views

USDJPY

The market remains around the mid-point of the bull channel off YTD lows currently. While 132.91 holds as support, the focus is on a continuation higher with 139.33 the next target for bulls. Momentum studies have weakened recently which is worth watching. Should we fall back below the 132.91 level and channel lows, 127.24 is the next support to note.