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A higher US inflation reading could spell disaster for currencies and equities

Mar.13.2018 11:00 am Asia/Dubai
By Konstantinos Anthis , Head of Market Research
Equities
Inflation
US Dollar

A higher US inflation reading could spell disaster for currencies and equities.
All eyes will be on the US Consumer Price Index report today as inflation is one of the key metrics for the Fed to decide their rate hiking path. Investors know that the US central bank will raise rates later this month but today’s data will be key in shaping expectations for the number of additional increases for the rest of the year so currencies and equities will take their cue from this release. The annual inflation rate is expected to print at 2.2% today – up from 2.1% last time around- and this is the figure everyone will keeping an eye on. A 2.2% printing or even lower will keep everyone happy as the Fed will still be expected to raise rates 3 times in total in 2018. Should this be the case, higher beta currencies like the Euro and the Pound will remain supported and the stock markets will continue on their upwards trajectory as the risk-on sentiment will remain in place. The risk however comes from a printing above 2.2% which is not such a far-fetched prospect but its repercussions will be quite significant. A hotter inflation means that the Fed will be forced to change their forward guidance when they meet next week and the prospect of a more aggressive path of 4 hikes this year will rock money and equity markets.


The Dollar is trading with a bearish tone for the past week and a half on the back of easing geopolitical tensions but a higher reading in the US CPI data will bring the greenback front and center again. The Euro will break below 1.23, Sterling will trend towards 1.38 and Dollar/Yen will break 107 to the upside as investors will rush to re-adjust their portfolios to benefit from the prospect of higher US interest rates.
In the equities’ universe, markets in Asia are mixed this morning and the European bourses are also trending towards a flat opening bell as traders are taking a cautious approach to today’s key data. Our base scenario is that inflation will print steady at 2.2% which will signal more gains for equities. However, in case of a stronger reading the Dow Jones will retreat below the 25,000 points’ mark and a new round of sell-off similar to what we saw in early February might kick off as the significance of today’s can’t be overstated.

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