US Inflation Trading Opportunities Ahead

US Inflation Trading Opportunities Ahead

The next two days of trading could turn out to be particularly interesting due to the sharp drop in CPI expected on (US time) Tuesday, as well as the market being (over?) confident that the Fed is going to pause its rate hiking cycle on Wednesday.

According to the CME Group’s FedWatch tool, traders are factoring in a 74% probability of no hike. The inflation data released on Tuesday could further support the argument that inflation is decreasing. The consensus among analysts is that the consumer price index will reveal a drop in inflation to a 4.1% annual rate in May, compared to 4.9% in the previous month.

A 74% chance means that stakes on the no-hike should be significant enough that if the market is wrong, a significant correction could be on the cards. A 74% chance is far from certain, and we might see a replay of what happened with the Canadian Dollar a week ago, where the market was confident that the BoC would continue its rate hike pause but was surprised when it came through with a 25bps hike.

Assets to watch: US indices, US dollar pairs, and gold. Last week, the S&P 500 achieved a significant milestone by gaining 20% from its October low. Meanwhile, the Nasdaq Composite has experienced an even more remarkable performance, soaring 33% from its lowest point in the past 52 weeks.

Optimism in these two indices might wane with inflation readings above expectations (although the data is coming in too late to have a major impact on the Fed decision the following day).

US dollar trades against the GBP might be in play, with UK-based economic data causing a bit of turmoil and uncertainty. The Pound has recently declined from its highest point in the past year, which aligns with a rise in the two-year bond yield, reaching its highest level since the market turbulence that followed Liz Truss’s mini-budget announcement.