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USD to rise as market awaits inflation cooldown

If the US inflation statistics released on Wednesday reveal a further acceleration, strategists predict that the dollar has room to increase gains, and stocks are likely to continue declining.

Other predictions include a further inversion of the US yield curve, more yen weakening, and a final euro depreciation against the dollar.

According to a survey of analysts conducted before the data was released at 8:30 a.m. in Washington, the US consumer price index likely increased to 8.8 percent annually in June from a 40-year high of 8.6 percent the previous month.

Here is what some of the strategists had in mind;

BlackRock Investment Institute Asia Pacific investment strategist Ben Powell

According to him, markets are undergoing a paradigm shift from an era of relatively lax policy marked by low inflation and low rates to one where volatility is mostly determined by supply. It will be a more difficult macro backdrop.

 “We think investors of all types now have to be a bit nimbler, and I guess a bit more focused around selectivity, rather than just a broad buy-any-dip-that-we-see mentality. Fundamentally, central banks are not there for us in the way that they have been over much of the last several decades.”

Wednesday’s US CPI print is expected to be high. To maintain credibility, the Fed will continue to emphasize its hawkish stance. Dollar strength and equity weakness may continue for some time. 

AllianceBernstein Holding LP co-head of Asia Pacific fixed income Brad Gibson.

According to him, the market needs multiple CPI prints to demonstrate that it has peaked and is rolling over. 

“We definitely anticipate that happening later this year.”

The market anticipates a headline CPI slightly higher than last month, but core inflation may ease. 

However, the conditions will not be sufficient for the bond market to substantially respond to change its yield-curve flattening bias at this time.

“It does feel like inflation this time is different to what we’ve experienced in the last even two decades. That playbook of the yield curve getting down to these levels and then potentially re-steepening may not be the playbook.”

The yield curve still has more room to invert. Real rates and rate differentials suggest that there is more room for the dollar to gain. 

Pepperstone Group head of research Chris Weston

In a research note, he stated that a CPI print below 8.5 percent would get the rates bulls fired up, with bond yields down hard. 

Consequently, I’d imagine (in this scenario) that the dollar drops universally, crypto goes up by at least 5 percent, Nasdaq 100 by at least 2.5 percent, and gold by at least 1.5 percent.

In contrast, a reading above 9 percent may support the market’s long position in the US dollar and support the idea that inflation will remain high for the remainder of the year. 

It should push the USD/JPY solidly back over 137, push the EUR/USD below parity, and put pressure on commodities.

 Banrion Capital Management founder and president Shana Sissel

If US consumer prices come in slightly higher than anticipated, the market would react negatively, although perhaps not as negatively as it did in the previous quarter, she said.

“I just think there’s an overly negative sentiment that we have. I think we’ve gotten overdone with the negative sentiment at this point.”

The market may move higher if the results are on par with or better than projected. 

Although the markets are anticipating high inflation, commodities are signs of easing.

 TD Securities team, including global head of rates strategy Priya Misra

Two-year Treasury Inflation-Protected Security breakevens are projected to increase as a result of strong headline inflation. 

“We have doubled down on our long position as we look for near-term inflation to remain elevated.”

TD maintains long 30-year real rates as the market increases the likelihood that Fed rate hikes would limit the pace of economic expansion.

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  • Phyllis Wangui

    Phyllis Wangui is a Financial Analyst and News Editor with qualifications in accounting and economics. She has over 20 years of banking and accounting experience, during which she has gained extensive knowledge of the forex, stock news, stock market, forex analysis, cryptos and foreign exchange industries. Phyllis is an avid commentator on these topics and loves to share her insights with others through financial publications and social media platforms.

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