Russell Shor

Last week's CPI numbers showed resilient inflation. This surprised markets and introduced 100bps as an option for the Fed. Join FXCM Market Specialists Russ and Nik as they discuss this, the new terminal rate, and the chances of the Fed overshooting. The two specialists also examine the yield inversion and discuss the BoJ's monetary policy. Please join us for these and more.

The current inflation tends to have a broad sticky element to it. This price resilience will likely concern the Fed until it shows moderation. However, per the preliminary University of Michigan Inflation Expectations survey, consumer expectations moderated to 4.6% (4.8% - previous). Moreover, the pricing elements from last week's Empire State and Philly Fed Manufacturing Indexes indicate moderation. Therefore, 75bps seems to make more sense at this stage.

The US 02-yr Treasury note jumped today, trading at levels last seen in November 2007. It's trading near 3.85%, reflecting market expectations of at least a 75bps hike next week. Some participants have discussed a 100bps increase, reflecting as a 26% probability presently.

Given the need to control inflation, the prospect of higher interest rates is a headwind for gold. As such, in our view, the probability of lower prices is the path of least resistance.

The CPI surprise yesterday led to a 3.9% decline in the US30. This plunge puts the index back in its bear zone between the lower blue and red bands. Moreover, the daily stochastic is rolling over (green rectangle). If it drops below 20 and holds (red arrow), a strong bearish momentum will be underlying.

The US interest rate is a crucial driver of financial markets in the current environment. This dynamic is despite the communication out of the ECB. I.e., the chart above shows the US real rate and its correlation coefficient (cc) with the EURUSD. The cc is at -58% and has been robust since the real rate turned positive at the end of April (green dashed line). Therefore, the current upswing in…

Whilst the greenback has pulled back over the last two weekly candlesticks (green square), it has a high correlation coefficient to real rates, at 77%. As such, we are interested in the real rate's reaction to any news release that may impact expected Fed monetary policy, such as today's CPI release.

The ECB has front-loaded and communicated that it is fully determined to do more, but the market may not be buying into the narrative. If the central bank cannot significantly impact Eurozone inflation, the higher rates won't bring inflation down to its target but will adversely affect economic activity.

Initially, the deficit spending and tight monetary policy may add support for GBPUSD. However, PM Truss has also promised to slash taxes, costing £38bn pa. This deficit increase may adversely affect the UK risk premium as gilts feel the pressure, ultimately exerting pressure on GBPUSD.

The real rate has been appreciating since its low in Nov 2021. However, the Fed March statement (red dashed vertical) was the first confirmation of quantitiative tightening (QT). Six weeks later, the real rate turned positive.

The Saudis cut oil production, but the oil markets remain in a downtrend. This weakness is ominous and primarily reflects the demand destruction.