US CPI In Focus

The big data event today is the US inflation release for February. With inflation expectations rising and US treasury yields trading just off 1 year highs, the market is bracing for potential volatility today in the Dollar and equities markets. The passing of president Biden’s $1.9 trillion fiscal stimulus package has shown just how elevated inflation expectations are with upside in stocks capped by the uptick in treasury yields. While fiscal stimulus is a major boost the economy and typically supports equities prices, the issue currently is that inflation expectations are so elevated that high and rising bond yields are capping upside momentum in equities. With oil prices surging and traders looking ahead to the anticipated acceleration of the economic recovery over Q2, today’s data has the potential to be very market moving.

Upside Inflation Risks

Over the prior month, headline CPI was seen at 0.3% while core CPI, which strips out more volatile components such as food and energy, was seen flat at 0%. This time around, the market is looking for 0.4% and 0.2% respectively. Readings in line with these expectations are likely to keep the current USD rally in play though should fuel too much demand. However, should we see any upside surprise today, this could ignite a fresh rally in US yields, causing equities to reverse sharply lower. The sharp rise in oil prices presents plenty of upside risk for today’s inflation data meaning that the headline CPI figure could well come in strongly above expectations, taking USD higher with it.

Fed Not Concerned By Inflation

The Fed has reaffirmed its stance on inflation, viewing any increase as transitory only and not a cause for concern. However, with speculative short positions in US treasuries hitting record highs last week, the move in yields is causing more and more of a scene. If yields continue to break out from here, the Fed is going to need to take a firmer stance against it, especially considering the huge amount of bond purchases the central bank is currently undertaking.

If Inflation Misses?

On the other hand, if inflation comes in weaker than expected today, essentially endorsing the Fed’s message, this could see yields and USD reversing sharply lower, helping send equities prices back up to recent highs, so there is plenty to keep an eye on with today’s release.

To stay aware of all the key releases each day, make sure to use our economic calendar.

Technical Views

DXY

The rally in the Dollar Index has seen price breaking out above the bear channel running from summer 2020 with price also breaking out above the 91.74 level. While above here, the bias is firmly bullish with the 92.82 level the next objective for the recovery rally. Below 91.74 and the 90.50 support is the next downside zone to watch.

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