• US inflation data to set the tone for USD and riskier plays

• Euro gets a boost from ECB reports, oil prices power higher 

• Tech sector leads stock markets down, gold nurses losses

US CPI in the limelight

Traders are locked and loaded for another edition of US inflation data today. Markets have concluded that the Fed won’t raise rates next week and this report is unlikely to change this notion. Still, it could shape expectations around the November meeting, which is priced almost as a coin toss.

Annual CPI inflation is projected to have risen to 3.6% in August from 3.2% previously, reflecting the resurgence in energy prices. In contrast, the core rate is seen moderating to 4.3% from 4.7% in July, with favorable base effects doing the heavy lifting. While Fed officials and investors usually focus on core CPI, the initial algorithmic-driven market reaction might come from the headline reading.

As for any surprises, the risks seem tilted towards a slightly hotter-than-anticipated inflation report, judging by the ISM business surveys and the Cleveland Fed nowcast model. The nowcast points to upside surprises in both the headline and core CPI prints. However, it’s a narrow model that mostly captures energy prices, so it should be taken with a grain of salt.

Overall, the dollar has turned into an ‘all weather currency’ again, offering a combination of solid economic fundamentals, highly attractive yields, and safe haven qualities. That stands in antithesis to the rest of the FX arena. Europe and China are battling severe economic slowdowns, the Japanese yen has been wrecked by rate differentials, and sterling is vulnerable to any shifts in risk appetite.

In short, the inflation report today will only influence short-term trading dynamics. In the big picture, the outlook for the dollar seems increasingly bright, amid a shortage of viable FX alternatives.

Euro capitalizes on ECB rumors

The scales have tipped in favor of another ECB rate increase on Thursday, following media reports that the central bank will revise its 2024 inflation forecasts higher. Markets are now pricing in a 70% probability that the ECB will raise rates tomorrow, for the final time this cycle.

This repricing helped boost the euro, particularly against the British pound, which has fallen victim to the deterioration in global risk sentiment. That said, investors seem to have ignored the part saying the ECB will also downgrade its growth forecasts, recognizing the worsening macro outlook.

For the euro, tomorrow’s ECB decision seems like a lose-lose situation. Even if the single currency spikes higher on a rate hike, the reaction might be minor and short-lived, as that’s the baseline scenario already and higher rates would simply add to concerns about faltering growth leading to a mild recession.

Oil pushes higher, equities and gold retreat

In the commodity complex, oil prices reached their highest levels in ten months. The heavy production cuts from OPEC+ have evidently overpowered fears of softer demand from China, with the supply/demand imbalance lifting crude prices even in a trading session marked by risk aversion.

Gold prices did not fare so well. The yellow metal retreated in what appeared like a response to rising oil prices, which are pushing inflation expectations higher, exerting upward pressure on bond yields by extension.

Finally, the tech sector led equity markets lower on Tuesday, erasing the gains from Monday to settle flat on the week ahead of the CPI release. Investors were not impressed by Apple’s new product unveiling as the company did not raise iPhone prices this cycle, in a sign that pricing power is dwindling amid strained consumer budgets and resurfacing competition from Huawei.