The European session is empty today and we will likely see some choppy price action as we head into the US CPI release. This week is all about the US CPI even though there are other central bank decisions. This report is one of the most important ones in several months and the market's reaction will likely be big. Buckle up!
13:30 GMT/08:30 ET - US November CPI
The US CPI Y/Y is expected at 2.7% vs. 2.6% prior, while the M/M measure is seen at 0.2% vs. 0.2% prior. The Core CPI Y/Y is expected at 3.3% vs. 3.3% prior, while the M/M reading is seen at 0.3% vs. 0.3% prior.
The market is pricing an 85% chance of a rate cut at the next week's FOMC meeting and at least two more 25 bps cuts in 2025. We will likely need a very hot report to force them to skip the December cut as it looks like they really want to deliver another cut before pausing.
If the data comes lower than expected, it should strengthen the current market expectations and might even add a bit more to the 2025 pricing. In this case, we will likely see a selloff in the US Dollar, a rally in bonds and risk assets.
Data in line with estimates shouldn't change much in terms of market expectations but will likely trigger the same reaction as if the data came out lower than expected although with less magnitude.
The worst case scenario would be another hot report, especially in the current context of stretched valuations and heavy risk taking. The complacency and animal spirits resemble a lot the 2021 mania. Even if the Fed decides to cut next week despite a hot CPI, the market will likely scale back further the rate cuts expectations for 2025 and that could trigger some risk aversion with the US Dollar rallying across the board and risk assets being sold.
14:45 GMT/09:45 ET - Bank of Canada Policy Decision
The BoC is expected to cut interest rates by 50 bps bringing the policy rate to 3.25%. The market’s expectations kept on swinging back and forth between 25 and 50 bps in the past weeks as we got a higher than expected
CPI report that strengthened the probabilities for a 25 bps cut, but then a weaker than expected
GDP report brought back the chances to basically a 50-50 scenario. The soft
labour market report on Friday though sealed the case for a 50 bps cut. After this cut, the market sees at least three more 25 bps cuts in 2025.
This article was written by Giuseppe Dellamotta at
www.forexlive.com.
