Dollar Reversal and S&P 500 Rally Add Focus to Today’s US CPI Release – DailyFX | Jewelry Dukan

S&P 500, VIX, CPI, EURUSD and GBPUSD Talking Points:

  • That market perspective: EURUSD bullish above 1.0000; Gold Bearish Below 1,680
  • The new trading week started with an extension of the risk rally in the second half of last week – propelling the S&P 500 to a 4-day rise and an unusual correlation to the VIX
  • Perhaps most notable from a technical perspective is the continued pullback in the US dollar, which looks particularly weighed down against the backdrop of Tuesday’s CPI

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Undeniable expansion risks assets but plenty of skepticism for conviction

We opened the new trading week with a continuation of the strong ‘risk on’ that characterized the second half of last week; and in doing so, markets continue to operate despite seasonal norms. I’m dogmatic about historical averages, but these assumptions have statistical relevance. When you add the systemic fundamental issues lurking in our current environment, there seems to be plenty of reason to proceed with caution. My skepticism aside for a moment, there was an unmistakably broad load of speculatively oriented markets at the start of this week. Global equities, emerging markets and carry trade enjoyed broader (if not deeper) gains, which satisfies my correlation criteria when judging the impact of sentiment. For the S&P 500, the 1.1 percent rise was the fourth straight rise, making it the longest stretch (five more falls) since Nov. 8. We have to rewind 10 months before we find any hint of a longer run. This doesn’t automatically mean a warning, but there are other things to consider.

S&P 500 chart with volume, 20- and 200-day SMAs and 3-day ROC (daily)

Chart created on Tradingview Platform

In a four-day rally, we may see the emergence of a long-term uptrend shift that could break the artificial cap of short-lived runs in 2022 or find a technical reset before extending further. That would not square with my concerns about aggressive monetary trend forecasting, nor the ongoing recession fears, but the collective “market” dictates what has priority. Another factor that may contribute to the four-day rally and seasonal context that suggests the S&P 500 will see historically averaged losses over the next three weeks (if we average the 52-week segmentation back to 1900) is the unusual relationship between the index and the VIX volatility index in the past session. Normally, the preferred measure of “risk” and the “fear” index move inversely, but that was not the case on Monday. We would see the S&P 500’s first rally of 1.0 percent or more and a VIX rise of a handle or more in two years. This event is not at all common, and the last two events happened near short-term highs. It’s wise not to assume that this pattern has to repeat itself, but it should be thought-provoking.

Chart of the S&P 500 overlaid with the VIX Volatility Index showing ‘meaningful’ positively correlated moves

Diagram Created by John Kicklighter

The basic speed increases significantly

When it comes to motivation for the opening fee of risky assets, I cannot deny that there was no fundamental anchor for bulls to base their predictions on. Although I don’t think there is a balanced bullish case to rest on; nonetheless, the New York Fed’s August Consumer Inflation Expectations report seemed to strike a chord that the collective had laid bare. According to the bank’s survey, expectations for inflationary pressures cooled to a 10-month low of 5.7 percent in one year, while the three-year hit a multi-year low of 3.2 percent. That’s clear fodder for the US CPI release due later in the day. Additionally, it reinforces the market’s assumptions of a rapid reduction in price pressures, which are valued in break-even rates. However, an inflation peak is not an automatic course back to the Fed’s interest rate. In fact, Fed members went to great lengths to warn that near-term inflation numbers, recessions and even market weaknesses would not dampen the group’s appetite to overhaul the price curve. However, FOMC members are in their media blackout, leaving upcoming US CPI for markets to interpret.

Calendar of major macroeconomic events

Calendar Created by John Kicklighter

As for the official forecast for the August US CPI, the consensus forecast is for underlying inflationary pressures to ease further from 8.5% to 8.1%, while core inflation is likely to rise slightly from 5.9% to 6.1% . A further moderation of the pace is expected, which will coincide with the retreat of the dollar and the rise of the indices. Therefore, a stronger than expected result might stimulate the larger impact. On the other hand, the relief moves we’ve seen in currencies and stocks are likely eating up the capacity for a macro relief update to generate some serious traction. However, how the market processes the news is up in the air. With the Fed in its self-imposed media blackout ahead of its next policy event (September 21), no clarification is expected from the political authority. Technically, this makes the situation interesting for EURUSD. While the dollar’s picture is not very notable on a trade-weighted basis, we are putting pressure on influential technical resistance at the base cross.

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Chart of EURUSD with 20-day SMA and 20-day disparity (daily)

Chart created on Tradingview Platform

Where is the dollar losing fundamental strength?

As the US currency slowly recovers from a decade-long high, it’s worth asking what motivated the incipient deleveraging. At first glance, it seems that the very early moderation of the monetary policy advantage plays a role. If cooler inflation tendencies are expected, the Fed could take its foot off interest gas and thus dampen the return potential of US investments. However, I contend that the majors like BOE, RBA, BOC and RBNZ are hardly fighting for an actual yield advantage. Barring the full stalling of the Fed’s tightening ambitions – which it appears to be reluctant to do – this knot is likely to be phased out only to a limited extent. The greenback’s safe haven status is another precarious element to assuming further USD losses are on the cards, leaving relative economic potential as a key issue. Given the BOE’s forecast for a UK recession before year-end, a GBPUSD recovery looks suspect.

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Chart of GBPUSD with 20-day SMA and 1-day rate of change (daily)

Chart created on Tradingview Platform

Referring to a pair like Cable, my assessment of bullish scenarios would not depend heavily on a systemic shift in the UK’s economic health from gloomy to blooming. Instead, it seems more practical that the US optimism counterpart is more at risk of losing ground and fueling action in the currency pair. I asked a survey via Finance Twitter about the likelihood of a US recession in 2022. The outcome of the poll was fairly even, with 54 percent voting yes and 46 percent voting no. That’s very different from the 82/18 percent split I had two months ago when I asked the same question — just after the supposed US CPI peak.

Graph of relative monetary policy standing with swaps year-end interest rate forecast

Diagram Created by John Kicklighter

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