Markets rise ahead of US CPI, Fed in focus

Asian markets traded higher on Tuesday, following the positive cues from Wall Street overnight after the S&P 500 rallied to its highest level in more than a year. Market sentiment has been lifted by hopes around the Federal Reserve pausing its tightening cycle with the People’s Bank of China’s decision to lower short-term lending rates stimulating risk appetite. The next few days promise to be incredibly eventful for global financial markets thanks to a long list of high-risk events ranging from key central bank decisions to top-tier data from major economies.

European futures are pointing to a positive open as focus falls on the pending Euro area and Germany ZEW economic sentiment reports. Looking at currencies, the dollar has edged lower ahead of the key U.S inflation data due later today. In the commodity space, oil prices are trading near their lowest level in almost three months thanks to ongoing concerns around the demand outlook while gold remains on standby. 

US CPI and Fed meeting in focus 

All eyes will be on the latest US inflation report which is expected to have slowed again in May after slightly easing in April. The headline CPI is forecast to rise 0.1% month-on-month after the 0.4% increase in April while the annual headline is seen cooling to 4.1% from 4.9%. However, focus will be on the core CPI reading which is projected to rise 0.4% in May while the annual reading is seen easing to 5.2% from 5.5% in April. Ultimately, signs of lower inflationary pressures may boost expectations around the Fed’s hiking quest coming to an end. Alternatively, a sticky reading could boost bets around US rates remaining higher for longer.

On Wednesday, the main focus will be the Fed decision which is expected to keep interest rates unchanged. Traders are currently pricing in a 28% probability of a 25bps hike, according to Fed funds futures. However, expectations may be influenced by Tuesday’s inflation data, especially if it prints hotter than expected. The updated dot plots and Fed Chair Jerome Powell’s press conference will be closely watched for fresh clues on the Fed’s next move. A hawkish hold seems to be the widely expected outcome of this meeting. Should the central bank surprise markets with a rate hike, this could boost the dollar and rattle markets.

Currency spotlight – EUR/USD 

A major breakout could be on the horizon for EURUSD as the currency pair braces for a week jam-packed with key risk events including the European Central Bank meeting on Thursday. Policymakers are expected to raise interest rates by 25 basis points, bringing the deposit rate to 3.50% from 3.25%. However, the key question is whether the central bank hiking cycle is nearing an end, especially after the eurozone entered into a technical recession at the start of the year. Over the past few weeks, EURUSD has been trapped within a range with support at 1.0686 and resistance at 1.0811. Should the pair break above 1.0811, this may open a path toward 1.0845 and 1.0900. A decline back towards 1.0686 may see prices test 1.0635.

Commodity Spotlight – Gold 

Gold edged higher ahead of today’s US inflation report and the Federal Reserve policy decision on Wednesday. The precious metal may display sensitivity to the latest US CPI report and is likely to weaken if the Fed moves ahead with a hawkish pause. A surprise rate hike has the potential to trigger an aggressive selloff towards levels not touched since mid-March at $1900. In the meantime, prices remain trapped within a range with support at $1935 and resistance at $1983.