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The upcoming United States Consumer Price Inflation report is set to be a market mover this week, as it is the last top-tier economic data release prior to incoming US President Joe Biden’s highly anticipated announcement on US stimulus.
According to market forecasts the report is expecting to show CPI inflation ticking higher by around 1.3 percent on an annual basis, and 0.1 percent on a monthly basis. Core CPI is expected to rise by around 1.6% on an annual basis.
Before dissecting the potential outcomes of this key inflation release it is important to understand that many market participants pay close attention to the Core CPI number inside the CPI inflation report.
Getting back to the release, risks are currently to the upside as the December US Market PMI showed an increase in prices charged by firms. This certainly implies that the December CPI number could be running hot.
Average earnings inside the December job report also rose quite sharply, and this was also in the face of large job US losses, which again implies that wage inflation is still taking place in the already distressed economy.
Another thing to watch out for is the ongoing food price increases. Food inflation is going up across the world. The recent sharp rise in wheat prices may not be factored into this month’s CPI report, but it certainly will next month.
Oil prices and natural gas have also been rising this month, although November and December both oil and natural gas saw some pretty dramatic two-way action as the U.S. election unfolded.
Rising US inflation and the prospect of coming US stimulus could certainly be the straw that breaks the camel’s back for the US dollar index. A combination of these two factors would be a potent combination for short-term strength.
The prospects of a “multi trillion” US stimulus package into the US economy would certainly create some much-needed momentum for the United States economy that could last well into the second to third quarter of the year. We also have to factor in markets expectations that interest rates may need to be raised if CPI is expanding at a faster-than-expected pace.
Effectively, the US central bank is there to add monetary support to the US economy, set rates, and steady inflation goals, which are set at close to two percent. If CPI does come in higher than expected, we should expect a big market reaction on concerns about rising rates.
Much also depends on COVID-19, however if history is anything to go by then the greenback certainly benefits when COVID-19 lockdowns and rampant infections are prevalent.
Aside from the US dollar, the other interesting trades to watch on a hot CPI number this or next month would be the metals trade, i.e., gold, silver, and copper. All three could suffer a similar fate if CPI is rising, and the market expects the FED to raise rates sooner than expected.
Gold Technical Analysis
The four-hour time frame shows that a bearish double-top pattern has formed, placing technical pressure on gold in the short-term. The pattern implies that buying interest was not strong enough to take gold to new highs.
Source by ActivTrader.
Furthermore, the Ichimolu indicator is currently issuing a sell signal, and clearly shows that gold has broken beneath cloud support and looks to be headed lower.
Key technical support is located at the $1,790, $1,1730, and $1,660 levels. To the upside, key resistance is found at the $1,860, $1,880, and $1,910 levels.
