• All eyes on the US CPI report later today
• Dollar loses some ground to start European morning trade
• Stocks remain hopeful ahead of US CPI report
• A quick glance at the Fed funds futures curve before the main event today
• Italy July final CPI +5.9% vs +6.0% y/y prelim

Markets:

• AUD leads, JPY lags on the day
• European equities higher; S&P 500 futures up 0.5%
• US 10-year yields down 0.4 bps to 4.003%
• Gold up 0.3% to $1,921.01
• WTI crude down 0.5% to $84.00
• Bitcoin flat at $29,481

It was once again another quiet session in Europe, with a lack of key economic data releases not really helping the mood.

Markets are gearing towards the US CPI report later today, so there wasn’t really much to work with in European morning trade.

The dollar sagged during the session but the losses weren’t anything too substantial, while risk trades are holding some hopeful optimism ahead of the inflation numbers later.

EUR/USD moved up from 1.0990 to 1.1030 while USD/JPY slipped from 144.10 to 143.70 levels during the session. As stocks are keeping higher on the day – at least for now – the commodity currencies are also holding higher. AUD/USD is up 0.6% to 0.6560 levels currently, though the coast isn’t clear yet after the test of 0.6500 this week.

After the dip buying in Wall Street fumbled late yesterday, stocks are keeping higher so far today. That said, we’ll see if the US CPI report will validate that sentiment later on.

This article was written by Justin Low at www.forexlive.com.

Essentially, not much has changed since the FOMC meeting last month. The Friday jobs report last week has only served to validate prevailing market sentiment and traders didn’t see much need to budge from the pricing after the Fed.

Considering that inflation data is the all the rage these days, there might be more of a reaction in Fed pricing today than we would have liked to see with the non-farm payrolls at the end of last week. But given that traders are not pricing in any more Fed rate hikes for the year (and some odds of a rate cut as early as March next year), there might not be much need to alter that outlook if the inflation data does fall within estimates i.e. still showing a gradually declining trend.

This article was written by Justin Low at www.forexlive.com.

Here’s a snapshot of things so far today:

• Eurostoxx +0.8%
• Germany DAX +0.4%
• France CAC 40 +0.8%
• UK FTSE -0.1%
• S&P 500 futures +0.6%
• Nasdaq futures +0.7%
• Dow futures +0.5%

It’s a solid rebound after dip buyers were dealt a blow late yesterday in US trading. The question now though is, can this carry on until the end of the day? A lesson to be heeded was that things also started brightly in European morning trade yesterday for stocks.

And this time around, there’s also the curveball from the US CPI report coming up later. The bulls will be hoping for that to carry the early optimism shown today. But as mentioned here, the risks aren’t all that balanced right now after the stuttering start to August trading for equities.

I would reserve caution on risk sentiment, especially if the inflation numbers later come in higher than estimated.

And in the bigger picture outlook, how will the latest run higher in oil prices factor in to the inflation equation? And what if oil prices continue to rise further amid tighter market conditions? There’s certainly a lot to ponder and surely it isn’t going to be a straightforward declining trend in inflation until next year. That would be too easy for central banks.

This article was written by Justin Low at www.forexlive.com.

• Which comes first? Low inflation or the economy breaking?

And as the Fed prepares to move to the sidelines, this question now involves how markets view the central bank outlook and if rates are sufficiently restrictive enough to bring inflation back towards the 2% target.

For the time being, traders are not pricing in any more Fed rate hikes and markets have more or less hinted that they can take in the prospects of a soft landing. And with each passing data point that validates such sentiment, it will give more confidence for risk trades and dollar bears to fan the flames.

The risk to this now is what happens when things don’t turn out according to the plan? Now, that’s the more interesting part and at least for the time being, there are no guarantees. We can only wait and see what the inflation numbers today will have to offer to this later.

This article was written by Justin Low at www.forexlive.com.

• Prior +6.4%
• HICP +6.3% vs +6.4% y/y prelim
• Prior +6.7%

Just a slight change to the initial estimates but Italian inflation is seen cooling a little more going into the summer. That’s some relative comfort for the ECB but these figures are still way too high.

This article was written by Justin Low at www.forexlive.com.