Lower US Inflation Expectations to Help Forex Market
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- U.S. CPI data should fall
- The pound and the euro should benefit from the news
- Stocks are flat awaiting the report
There is a widespread expectation that the U.S. CPI data, which will be released later in the day, will be lower than expected. This would improve market optimism and have a cascading effect, creating a more favorable environment for the euro and the pound sterling to gain ground on an insatiable U.S. dollar. At the same time, Wall Street stocks are still managing expectations until the figures are released, moving flat in the early hours, but with the hope of being able to rise in the morning.
Possible improved inflation outlook
All the day’s interest will focus on the CPI numbers coming from the United States. The general consensus among analysts is that these numbers will be lower. This would be positive for the market and currencies other than the U.S. dollar could finally see some strength start to return. A drop in the numbers would also call into question upcoming actions by Jerome Powell and the Federal Reserve regarding interest rates.
Inflation has been the main problem troubling the economy and something policymakers have struggled to control in the wake of the pandemic. The fact that the numbers are expected to be lower, especially after a lower reading in July, should be good news. It could also push the Fed to consider a smaller interest rate increase of 50 basis points instead of the expected 75 basis points.
The pound and the euro should benefit
Any drop in CPI will almost certainly be reflected today in the pound and the euro. Both currencies have faced various difficulties recently. The latest for the pound was the death of the queen, but that news seems to have created only a temporary blip from which the GBP has emerged.
On the euro side, the common currency now appears to be a more attractive proposition as it pushes well above parity against the U.S. dollar. This comes after having struggled for several weeks at times below $1.00. Employment data will also play an important role, but expect both markets to find some relief if CPI data eases.
Wall Street remains cautious
Wall Street stocks continue a more positive stretch. The major U.S. markets started the week strongly with gains on Monday. This extends a more positive trend that saw last week end several weeks of consecutive losses. The Dow Jones, Nasdaq and S&P 500 all posted gains on Monday of about 1%. Investors are now waiting to digest the latest CPI figures, which could lead to further rises later in the day after the opening bell.
A lower CPI figure could help signal to many that inflation has peaked and that higher interest rates and economic policies are showing results. If that is the case, expect further gains later in the day after the opening bell.
