US CPI On Watch

The big data focus for markets today, and this week indeed, is the US CPI release for April. Following the 0.6 headline CPI reading over the prior month, the market is forecasting a decline to 0.2% over May. Core CPI, however, is forecast to remain unchanged at 0.3%. This reading is attracting a great deal of attention given the upward revisions to the fed’s economic forecasts delivered at its recent meeting. With the Fed now acknowledging that inflation is likely to rise as a result of reopening and the utilisation of the pent-up demand in the economy, there are upside risks for today’s data, especially given the low expectations.

If inflation beats the consensus forecasts there is plenty of room for USD to reverse higher given the sell-off over the last month. A firm beat will put the focus back on Fed tapering discussions pushing yields and US higher, while pulling equities down deeper. On the other hand, if CPI misses today or merely comes in inline with expectations, the USD reaction is likely to be muted though we could see some lift in equities markets.

Where to Trade US CPI?

US 10Y

The US10Y has been correcting lower within a bearish channel since the 2021 highs in March. The structure can be viewed as a bull flag formation, suggesting an eventual break higher and continuation of the bullish phase over Q1. Strong CPI today could see price break the channel and test the 1.685 level next with the 1.770 highs the target above.

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