Market participants are bracing themselves ahead of the release of crucial US economic data, the consumer price index, which will be published tomorrow and may have a widespread impact on the dynamics of all global financial markets without exception.
The general expectations for the annual rate of consumer inflation in the US increased to 3.6% in August from 3.5% in July. This is the first rise in inflation expectations in the last five months. Price growth forecasts for the coming year were upgraded primarily due to energy price inflation. Gasoline prices jumped by 0.4% to 4.9%, followed by food products by 0.1% to 5.3%, and medical services by 0.8% to 9.2%. In addition, the cost of education increased by 0.2% to 8.2%, and accommodation rent by 0.2% to 9.2%. The average expectations for housing price growth grew by 0.3% to 3.1%, marking the highest level since July of the previous year. Meanwhile, the average inflation expectations for the next 5 years increased by 0.1% to 3%. Conversely, the overall inflation expectations for the next 3 years decreased by 0.1% to 2.8%. In such an uncertain environment, investors are looking forward to tomorrow's report on the consumer price index. So, could the markets crash tomorrow if the inflation data shows the expected growth? Yes, it's quite likely that if the consumer inflation index surpasses expectations, it could lead to a temporary weakening of demand for risk assets.
However, it's highly likely that we won't see a notable decline in the stock market and an appreciation of the US dollar based on Treasury yield dynamics. A potential offset to this negative could be a significant weakening in the labor market, as indicated by the latest economic statistics. Importantly, the Federal Reserve has consistently pointed to a strong labor market as the justification for raising interest rates to combat high inflation.
At present, the unemployment rate has risen to 3.8% from 3.5% and the number of new jobs over recent months consistently has fallen below the 200,000 mark. The number of unemployment benefit claims, conversely, exceeds this mark. Therefore, it can be assumed that the Federal Reserve will not raise interest rates at the policy meeting in September. They would not want to further destabilize an already challenging economic situation to the point of entering a recession, which they have managed to avoid so far.
By the way, according to the dynamics of futures on federal funds rates, there's a 92% likelihood that the market believes interest rates will be put on hold at the FOMC's meeting on September 20th. In this context, we may conclude that if the Federal Reserve displays a firm position on interest rates and if they don't increase, this could boost demand for stocks and, conversely, weaken the US dollar. Besides, if the inflation data unexpectedly turns out to be even slightly below the forecast, it might encourage a rally in stock markets tomorrow, lasting until the end of this week.
Intraday outlook
AUD/USD
AUD/USD is trading in the range between 0.6365 and 0.6520. The aussie dollar finds support from a series of fresh positive data from China on the one hand, and from expectations that the US Fed could make a pause in rate hikes at the meeting in September. Based on these fundamentals, we assume that AUD/USD might grow to the upper border of the trading range, i.e. 0.6520 after it overcomes 0.6445.
NZD/USD
Following the overall uptrend, the instrument has entered the range between 0.5900 and 0.6000. If NZD/USD settles above 0.5900, the door will be open to 0.6000.