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CPI outlook and expections

CPI Outlook
Market Conditions:
According to Fed Chair Powell, inflation remains high, and the central bank
aims to bring it down to their 2% target, he also mention he may keep rates
higher for a longer if need be.
Recent news suggests robust economic activity despite a relatively high
interest rate of 5.5%.
Key economic data includes improved ISM Services (54.5) and
Manufacturing PMI (47.6), and NFP data showing job market growth.
The VIX is at a low level of 14.24, indicating low market fear.
The DXY is currently trading between 104.6, and gold is trading between
1908 and 1912.
Step 1: USD Pairs Outlook:
1. Inflation and Interest Rates:
High inflation tends to drive up interest rates, making the USD attractive
for investors seeking higher yields.
2. Economic Activity and Employment:
Strong economic activity, as indicated by the NFP data (187k jobs
added), supports the USD due to a healthy job market.
3. DXY (Dollar Index):
The DXY is currently trading between 104.6, indicating the USD's relative
Trade Ideas for USD Pairs:
Given the Fed's commitment to controlling inflation, consider long positions in
USD pairs against currencies with lower interest rates.
Monitor the DXY for potential breakouts above 105 as a sign of USD
strength, retest of 104.500 could happen before the news.
Step 2: GOLD Outlook:
1. Inflation Hedge:
Gold is often seen as a hedge against inflation, but its performance may
be influenced by market sentiment.
Currently, the VIX is at a low level (14.24), indicating low market fear.
2. Economic Activity and Risk Appetite:
Strong economic activity may reduce the need for safe-haven assets like
gold, potentially putting downward pressure on its price.
Trade Ideas for GOLD:
Short positions in gold if you anticipate that low market fear and robust
economic activity will continue. But the lag effect is coming more into play
with the recent data but still elevated.
Scenario 1: CPI Meets Expectations
CPI Data:
CPI m/m: 0.6%
Core CPI m/m: 0.2%
CPI y/y: 3.6%
Fed Action:
If CPI meets expectations, with a monthly increase of 0.6% and a year-over-year
increase of 3.6%, the Fed may maintain its current stance or increase rates as
the increase is much higher than the previous showing that inflation could come
back to play .
Scenario 2: CPI Surpasses Expectations
CPI Data:
CPI m/m: Higher than 0.6%
Core CPI m/m: 0.2%
CPI y/y: Higher than 3.6%
Fed Action:
If CPI exceeds expectations, especially if the monthly increase is significantly
higher, the Fed could become more concerned about inflationary pressures. In
this case, they might consider the following actions:
Discuss the possibility of accelerating the tapering of asset purchases to
reduce monetary stimulus.
Begin signaling a potential interest rate hike sooner than previously expected
to counteract rising inflation.
Scenario 3: CPI Below Expectations
CPI Data:
CPI m/m: Lower than previous or around 0.3%
Core CPI m/m: 0.2%
CPI y/y: Lower than 3.4%
Fed Action:
If CPI falls below expectations, indicating weaker inflationary pressures, the Fed
might adjust its stance as follows:
Maintain its current interest rate level and look to when they can start easing .
Delay any discussions of interest rate hikes to ensure that the economy
remains on a stable growth path.