The markets have likely been running on the blowout non-farm employment change (NFP) released on 3rd Feb (orange dashed vertical), over any Fed communication. This suggests a heavy reliance on data and tomorrow we get the CPI at 1:30 pm GMT.
Since the NFP, the US 10-year real rate has appreciated bringing FXCM's USDOLLAR basket with it. The correlation coefficient between the two is a significant 85%.
A weaker than expected core CPI will pressure real rates and the greenback. It is currently at 5.7% and its acceleration is extremely close to dropping below zero (green rectangle). A drop below will put it firmly in deceleration territory, which is needed to reach the Fed's inflation target of 2% average.
An upside surprise will thwart this. Markets will turn even more bearish and see capital rotation towards safety.
Senior Market Specialist
Russell Shor joined FXCM in October 2017 as a Senior Market Specialist. He is a certified FMVA® and has an Honours Degree in Economics from the University of South Africa. Russell is a full member of the Society of Technical Analysts in the United Kingdom. With over 20 years of financial markets experience, his analysis is of a high standard and quality.